Quasi-Indexer Institutions and Auditor Independence: Evidence from Non-Audit Service Fees

Abstract

We find that quasi-indexer ownership is negatively associated with the ratio of non-audit service fees to total fees paid to the audit firm and with the likelihood of paying the audit firm more non-audit service fees than audit service fees. Using the annual Russell 1000/2000 index reconstitution as exogenous variation in quasi-indexer ownership, we show that the dampening effect of quasi-indexer ownership on companies’ purchase of non-audit services from auditors is causal. We interpret our finding as evidence consistent with quasi-indexers’ predilection for high-quality accounting information and with their belief about the impairment effect of non-audit services on auditor independence.