The role of institutional ownership in the market for auditing services: an empirical investigation

In this paper, we report the results of an investigation of the relation between auditor firm size and the level of institutional ownership. In this paper, we argue that institutional owners demand high audit quality. As a result, they prefer audits conducted by large audit firms because they perceive that these firms, on average, provide relatively higher audit quality. Because institutional owners have large holdings, they have more influence over management. Therefore, the greater the level of institutional ownership, the more likely that a firm will provide audits conducted by a large audit firm. Our findings support this assertion-institutional ownership is positively associated with the audit firm size, even after controlling for other variables that could account for such an association, including client firm size, debt, growth and business complexity.