The Impact of Foreign Ownership on Firms’ Audit Opinion Shopping Behavior

Abstract

This study examines whether foreign investors influence firms’ opportunistic auditor choices for a better audit opinion. Foreign investors that are typically institutional investors and have global portfolios of equity shares are regarded as more sophisticated than domestic investors. Thus, they are more likely to perceive investing firms’ opinion shopping behavior than domestic investors. However, due to less informal channels through which they can communicate with insiders (e.g., CEO, board members and controlling shareholders), foreign investors may not exert influence on such managerial decisions. Our empirical findings reveal that firms tend to change (retain) the existing auditors when the probability of receiving a modified audit opinion is lower (higher) from a new auditor, implying the evidence of successful opinion shopping in our sample firms. More importantly, we find that firms’ opinion shopping activities decrease significantly with foreign ownership. These findings suggest that foreign investors play a significant role in deterring managerial opportunistic decisions on auditor choices, which enhances auditor independence. Our findings are robust when we control for the firm characteristics that attract foreign shareholders. These findings provide helpful insights to researchers, regulators and practitioners.