The impact of institutional ownership and corporate debt on audit quality

Abstract

Purpose – The purpose of this paper is to examine the impact of institutional holdings and corporate debts on audit quality, proxied by auditor industry specialization. Design/methodology/approach – The tests use regression analysis for a sample of 396 company-years from 2003 to 2008 and control for factors known to affect auditor industry specialization. Findings – The results show a positive association between institutional ownership and auditor industry specialization. These results are consistent across most measures of auditor industry specialization and different thresholds of audit firm market share. In addition, a positive link is reported between corporate debt and industry specialization by auditors. This result, however, holds under the composite proxy in terms of total assets only. Research limitations/implications – The major limitation is the unavailability of data on audit fees and sales (revenues) to measure auditor market share. Practical implications – Institutional investors and debtholders have preference for auditors who can enhance the credibility of financial reporting and improve the quality of financial information and the results document that the choice of specialist auditors can potentially influence this objective. Originality/value – The paper provides information to academics, regulators, companies, and auditors concerning the impact of institutional investors and creditors on the choice of industry specialists. Also, it shows the importance of industry specialization on audit quality.