multiple blockholdings and auditor behavior k.k. raman1, chunlai...
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Multiple Blockholdings and Auditor Behavior
K.K. Raman1, Chunlai Ye2, Lin-Hui Yu3
ABSTRACT This paper examines whether multiple blockholdings are associated with auditor
behavior. Using a sample of S&P 1500 firms, we examine whether multiple blockholdings of
institutional investors play a role in audit fees and audit report lags. First, we find that while
auditors spend more time preparing audit reports for firms monitored by multiple blockholders,
auditors do not charge higher fees. Second, we find that fee pressure exists in firms with more
experienced multiple blockholders as manifested by having industry knowledge and accumulated
monitoring experiences. Finally, we find that while auditors work longer hours for firms with
more experienced multiple blockholders, they charge lower fees when firms report higher returns
on assets and have higher leverage, suggesting that firms monitored by more experienced
institutional investors know how to bargain more effectively based on financial positions.
Overall, this paper provides findings that are relevant to the current capital market, in which
institutional investors and multiple blockholders have become more influential.
1The University of Texas at San Antonio, San Antonio, USA 2Texas A&M University-Corpus Christi, Corpus Christi, USA 3National Taiwan University, Taipei City, Taiwan
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I. Introduction
An agency problem arises when there is a separation of ownership and control in a
company. Prior research has identified several mechanisms to improve corporate governance and
to reduce agency problems. For example, Shleifer and Vishny (1986) show that a large stake in
ownership held by outside shareholders is a potential solution, as large investors are more
incentivized to monitor. Jensen and Meckling (1976) and Watts and Zimmerman (1983) indicate
that an audit by an independent auditor is another mechanism for mitigating agency conflicts and
should reduce managers’ opportunistic behavior. Because both large shareholders and auditors
play a pivotal role in monitoring management and in reducing agency costs, prior research has
shown interest in investigating the interaction between these two parties. For example, Cassell et
al. (2018) find that audit fees are higher for firms with more institutional investors. Similarly,
Raghunandan and Rama (2007) suggest that the demand for a high quality audit is higher for
firms with higher levels of outside blockholder ownership and document that audit committee
meeting frequency is higher for firms with higher levels of blockholdings.
While prior research enhances our understanding of how institutional investors affect
audit behavior, it largely ignores the fact that institutional investors serve as common owners in
multiple firms. Whether cross-holding of institutional investors affects auditor behavior warrants
further analysis, as institutional investors and multiple blockholders have become more
influential in the current capital market. Institutional investors own 70%-80% of equity of U.S.
publicly traded firms and institutional cross-holding has rapidly increased in recent years
(Ben‐David et al. 2016; Azar et al. 2018). The increase in institutional holdings and cross-
ownership increases the concern about whether multiple blockholdings affect the pricing power
of companies (Solomon 2016; Azar et al. 2018). Motivated by this void in the literature and the
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importance of this concern, we investigate whether multiple blockholdings of institutional
investors affects auditor behavior—audit fees and audit report lags—and study whether two
characteristics of multiple blockholders—industry knowledge and investment horizon—explain
these associations.
In this study, we examine S&P 1500 firms from 2003 to 2017 and adopt the approach
proposed by Kang et al. (2018) to obtain the predicted and residual number of blockholdings by
a firm’s largest institutional investor. This approach is advantageous in that it controls for an
institutional investor’s fund size. Thus, a large residual from the prediction model reflects the
extra number of blockholdings an institutional investor holds and not merely the fact that this
institutional investor has more resources to manage its portfolio so that it has more blockholdings.
Next, we identify a firm as monitored closely by a multiple blockholder if the residual
blockholdings of the firm’s largest institutional investor is higher than the median of the sample.
We first examine whether multiple blockholdings are associated with audit pricing and
propose two competing arguments. On one hand, if multiple blockholders acquire more
privileged access to management in their portfolio firms, they may assess managers’ true effort
and monitor managers’ behavior more effectively. Thus, they may rely less on monitoring
through financial statement numbers but directly communicate and influence corporate behavior
(Hölmstrom 1979; Ke et al. 1999). This argument predicts that the demand for a high quality
audit is lower for firms whose investors cross-hold substantially in other companies. On the other
hand, it is also possible that because of time constraints and limited attention, multiple
blockholders are less likely to develop close ties with management and need to monitor through
accounting numbers, increasing the demand for a high quality audit (Kempf et al. 2017; Liu et al.
2017). Furthermore, institutional investors with blockholdings may better understand the benefits
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of a high quality audit and thus be more willing to pay higher fees for auditors’ assurance
service (Kane and Velury 2004; Raghunandan and Rama 2007). The latter argument leads to a
positive association between multiple blockholdings and audit fees.
Next, we examine whether multiple blockholdings are associated with auditor effort. The
analysis of the association between multiple blockholdings and auditor behavior is not complete
if we ignore auditor effort. If both audit fees and auditor effort increase for firms whose
institutional investors own multiple blockholdings, it indicates that auditors are compensated for
the extra effort requested by multiple blockholders. This evidence is consistent with the view that
multiple blockholders value high-quality audits and are willing to pay for the extra effort. On the
other hand, if audit fees remain unchanged or decrease and audit report lags increase, it indicates
that auditors face fee pressure and are unable to raise audit fees to compensate for extra work.
This finding may raise the concern about whether multiple blockholders have a negative impact
on auditors’ long-term profitability.
Empirical results show that while multiple blockholdings are positively associated with
audit report lags, auditors do not charge higher audit fees. In other words, while multiple
blockholders may be associated with higher litigation risk, increasing the workload of auditors,
auditors do not raise audit fees based on the additional working hours. This evidence is
consistent with the views that common ownership may have a negative influence on pricing in an
industry (Solomon 2016; Azar et al. 2018) and that common ownership increases audit fee
pressure.
To find out whether characteristics of institutional investors explain the associations
above, we examine whether industry knowledge and investment horizons help multiple
blockholders obtain price concessions. We find that audit report lags are longer for firms
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monitored by multiple blockholders, regardless of industry knowledge. We also find marginal
evidence to suggest that auditors are able to raise fees only for firms whose largest institutional
investors do not have industry knowledge. Regarding investment horizons, we find that audit
report lags are longer only for firms whose largest institutional investor is a long-term investor;
however, we do not find evidence to suggest that auditors are able to charge higher fees
accordingly. Taken together, our findings suggest that auditors react differently to different
characteristics of multiple blockholders. Specifically, when auditors exert greater effort for firms
whose largest investor has a diversified portfolio, they are compensated for additional working
hours. When auditors work additional hours in the presence of multiple blockholders with
industry knowledge and long investment horizons, auditors make fee concessions and do not
charge higher fees.
We further examine whether a firm’s financial position plays a role in the association
between multiple blockholdings and auditor behavior, focusing on firms’ leverage and
profitability. Consistent with prior literature, we first document that audit fees are positively
associated with leverage and negatively associated with profitability. However, auditors react
differently toward leverage and profitability in the presence of multiple blockholders. We find
that firms with more experienced multiple blockholders pay lower audit fees when they report
higher leverage and higher return on assets. However, these associations do not hold for firms
with less experienced multiple blockholders. Our results are consistent with the view that more
experienced multiple blockholders perceive high leverage to be associated with lower agency
costs, and thus are less willing to pay for high quality audits. Our results also indicate that while
the presence of more experienced multiple blockholders increases auditors’ litigation risk,
auditors perceive the risks to be lower when companies are more profitable.
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Finally, we perform sensitivity tests. Our results are robust to alternative measures of
multiple blockholdings. First, we re-identify a firm as monitored closely by a multiple
blockholder if a firm’s Top 5 institutional investors have residual blockholdings higher than the
median of the sample. We repeat the analyses and focus on the Top 10 institutional investors.
Our inferences remain unchanged. Furthermore, to address the concern that our results are driven
by firms with different reporting schedules, we restrict our analysis to firms having the same
reporting deadline of 75 days after the fiscal year ends. While our sample size decreases
substantially, the results remain constant.
The remainder of this article is organized as follows: Section 2 reviews the literature and
develops the hypotheses; Section 3 describes the sample and the empirical measures; Section 4
presents the empirical results; Section 5 provides additional analyses; Section 6 presents the
sensitivity tests; and Section 7 concludes the paper.
II. Literature Review and Hypothesis Development
2.1 Auditors, institutional investors, and blockholdings
Jensen and Meckling (1976) suggest that agency problems arise when there is a
separation of ownership and control and when managers act at the expense of shareholders.
Shareholders can reduce agency costs through monitoring activities. However, it is costly to
gather and analyze information and to take actions to influence management. Therefore, small
investors are less interested in monitoring managers but free-ride on large investors’ monitoring
efforts. As the ownership structure becomes more diffused, the free-rider problem becomes
more severe (Grossman and Hart 1980; Shleifer and Vishny 1986; Ang et al. 2007). Different
from small shareholders with diffused ownership, institutions with large holdings are more
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willing to devote resources and effort in monitoring activities as they have more at stake and
enjoy higher net benefits from active monitoring (Chen et al. 2007). Consistent with this view,
prior literature documents that large shareholders actively monitor management and
subsequently enhance firms’ performance, as manifested by higher stock prices, higher
profitability, and better innovative performance (Chen et al. 2007; Aghion et al. 2013). Prior
literature also finds that large shareholders influence executive compensation, increasing pay-
for-performance sensitivity and decreasing the level of compensation (Hartzell and Starks 2003),
and that they are more likely to fire CEOs for poor performances (Kang et al. 2018).
While a large body of literature documents how large shareholders monitor management
and influence corporate behavior, the role or auditing in institutional investors’ monitoring
activities has received much less attention. In fact, auditing represents a monitoring mechanism
and auditors adjust the scope of the audit based on the agency conflicts between management
and shareholders. Agency costs are associated with audit risk and auditor business risk, which in
turn should affect auditor behavior. Given the importance of auditing, some prior research
examines whether blockholdings are positively or negatively associated with audit fees; however,
the empirical evidence remains mixed and warrants further analyses (Hay et al. 2006). On one
hand, institutional investors with blockholdings are sophisticated investors and are more likely to
understand that credible financial statements reduce agency costs and provide governance
benefits, and thus to value auditor assurance services (Kane and Velury 2004; Raghunandan and
Rama 2007). In addition, if auditors perceive that institutional investors with blockholdings are
associated with investor activism and increase audit engagement risk, they may charge higher
audit fees (Cassell et al. 2018). These views support the arugment that blockholdings are
positively associated with audit fees. On the other hand, as blockholders have privileged access
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to managers; they can directly communicate with management and intervene in corporate
decisions and thus rely less on monitoring through accounting numbers (Hölmstrom 1979; Ke et
al. 1999). In addition, as agency conflict is lower in the presence of investors with blockholdings,
the audit engagement risk should decrease (Francis and Wilson 1988; Ang et al. 2007). These
latter two arguments predict a negative association between blockholdings and audit fees. Taken
together, whether the presence of institutional investors with blockholding is positively or
negatively associated with audit fees is an empirical question.
2.2 Multiple blockholdings and audit fees
While prior literature enhances our understanding of how institutional blockholders affect
audit fees, it often ignores the fact that institutions may have large blockholdings in multiple
firms at the same time. This fact is important as multiple blockholdings affect institutional
investors’ incentives and effort to monitor management, which in turn should affect auditor
behavior. To address this void in the literature, we examine whether multiple blockholdings are
associated with audit fees and audit report lag. Regarding audit fees, we discuss two competing
arguments. First, multiple blockholdings enable institutions to develop privileged access to the
management teams and gain insider information from their portfolio companies. Because
institutional investors improve their monitoring skills through the monitoring experience and
information obtained from multiple blockholdings, they may be more effective in direct
monitoring and rely less on monitoring through audited financial statements (Kang et al. 2018).
This argument predicts a negative association between multiple blockholdings and audit fees. On
the other hand, multiple blockholdings may distract institutional investors and make it less likely
that they will develop close ties with management. Prior literature provides evidence that
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institutional investors face time constraints and have a limited attention span. For example,
Kempf et al. (2017) find that when institutional investors’ monitoring attention is diverted,
managers react to the looser monitoring and engage in value-destroying acquisitions. Similarly,
Liu et al. (2017) document that distracted institutional investors are less effective in disciplining
directors and are associated with poor board oversight. Thus, to the extent that institutional
investors are distracted and less likely to directly monitor managers and intervene in corporate
decisions, they may rely more on monitoring through accounting numbers. Stronger reliance on
financial statements increases the value of auditing services, leading to a positive association
between multiple blockholdings and audit fees. Taken together, whether multiple blockholdings
are positively or negatively associated with audit fees is an empirical question and warrants
further investigation.
We also examine whether the characteristics of multiple blockholders play a role in audit
pricing. We focus on institutional investors’ industry knowledge and investment horizons, and
expect that the association between blockholdings and audit fees varies across the characteristics
of blockholders. Prior literature documents that institutional owners gain industry knowledge and
improve monitoring effectiveness through multiple blockholdings in other portfolio firms
operating in the same industry. Multiple investments in the same industry reduces information
asymmetries between institutions and their portfolio firms, because multiple blockholders learn
more about the “private” probability of an average company’s success in the industry and are
more able to identify managers’ true effort (Eisenhardt 1989; Cressy et al. 2007). Furthermore,
firms in the same industry share commonalities, enabling multiple blockholding institutional
investors to accumulate industry-specific information relevant to monitoring firms. In other
words, multiple blockholding institutional investors can get access to and compare financial
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policies and performance information across firms in the same industry, increasing the
effectiveness of their monitoring. Thus, to the extent that multiple blockholding institutional
investors develop and improve their industry-specific monitoring skills, they are more likely to
directly monitor managers and rely less on monitoring through financial statements, decreasing
their willingness to pay auditors.
Regarding investment horizons, we follow prior literature and predict that multiple
blockholders may monitor investee firms more effectively when they hold shares for a longer
horizon. A longer investment horizon provides not only the incentives to monitor but also
opportunities to improve monitoring skills (Gaspar et al. 2005; Chen et al. 2007;
Ramalingegowda and Yu 2012; McCahery et al. 2016). In addition, institutions are more likely
to develop close ties and exert greater influence on managers when they hold shares for a longer
time. Thus, compared to multiple blockholders with short investment horizons, those with long
investment horizons should prefer monitoring managers directly to monitoring them through
accounting information. As investors’ monitoring abilities and reliance on monitoring through
financial statements vary across investment horizons, we expect that the willingness of
institutional investors to pay for the auditing service varies with investment horizons.
Overall, we expect that multiple blockholdings play a role in audit pricing and that the
characteristics of multiple blockholders explain the variation in audit fees. On the basis of the
discussion above, we propose the following set of hypotheses:
H1. There is an association between multiple blockholdings and audit fees.
H1a: Characteristics of institutional investors are associated with the association between
multiple blockholdings and audit fees.
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2.3 Multiple blockholdings and auditor effort
Next, we examine whether multiple blockholdings is associated with auditor effort. This
analysis is important as it is possible that audit fees and auditor effort do not change in the same
direction (i.e., audit fees and auditors’ effort exhibit an increase or a decrease independently
when a firm’s largest institutional investor is a multiple blockholder). Specifically, it is possible
that auditors make pricing concessions for firms with multiple blockholders because multiple
blockholders have enhanced capabilities and incentives to monitor audit pricing and demand
lower audit fees. However, this price concession may not necessarily suggest that auditors exert
low effort. In fact, auditors may still exert enough or even higher effort when firms are
monitored by multiple blockholders, as engagement risk may increase in the presence of
sophisticated institutional investors (Cheng et al. 2010; Cox and Thomas 2006; Cassell et al.
2018).
To proxy for auditor effort, we follow prior literature (Knechel and Payne 2001; Ettredge
et al. 2006; Knechel et al. 2009; Blankley et al. 2013) and examine whether the audit report lag
differs for firms whose largest institutional investor has multiple blockholdings. Similar to H1,
we also predict that audit report lags vary with characteristics of multiple blockholders. Based on
the discussion above, we predict the following:
H2. There is an association between multiple blockholdings and audit report lags.
H2a: Characteristics of institutional investors are associated with the association between
multiple blockholdings and audit report lags.
III. Sample and Empirical Measures
3.1 Sample construction
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We construct our sample using the following data sources: (1) institutional holding
information from Thomson Reuters (13F); (2) financial statement data from COMPUSTAT; (3)
audit, going concern opinion, and internal control weakness information from Audit Analytics;
and (4) price information from the Center for Research in Security Prices (CRSP). We begin
with all firms included in the S&P 1500 index and firms for which we have the necessary data to
derive the control variables. We exclude firms in financial institutions (SIC 6000-6999) because
these firms face a different reporting environment. Our final sample consists of 14,022 firm-year
observations, covering 1,740 firms during the 2003–2017 period. Table 1 presents the annual and
industry distributions of our sample.
3.2 Measure of multiple blockholdings
Consistent with Kang et al. (2018), we measure the monitoring effectiveness of multiple
blockholdings using the residual approach. First, we estimate the following regression using
institution-quarter observations:
LNRAW_BLOCKHOLDINGjq = β0 + β1INST_TOTAL_MVHOLDINGjq + εjq (1)
Subscripts j and q indicate institutional investors and quarters, respectively. The dependent
variable, LNRAW_BLOCKHODING, is the natural logarithm of the number of firms for which
an institutional investor simultaneously owns more than 5% of the firm’s shares and is set to zero
if the institutional investor, j, does not have any blockholdings in firms in quarter q. The
independent variable, INST_TOTAL_MVHOLDING, is measured as the average market value of
equity managed by institutional investor j during the previous four quarters, scaled by the
Consumer Price Index in 2000.
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Next, we calculate the residual of multiple blockholdings at the investee firm-year level.
For each S&P 1500 constituent, we identify firm i’s largest (Top 1), five largest (Top 5), and ten
largest (Top 10) institutional investors based on the holding information at the end of year t–1
and use the residuals from Equation (1) to construct TOP1_INTOWN, TOP5_INTOWN, and
TOP10_INTOWN. Specifically, TOP1_INTOWN is measured as the residual blockholding
number owned by firm i’s largest institutional investor. TOP5_INTOWN (TOP10_INTOWN) is
measured as the weighted average of the residual blockholding number owned by firm i’s Top 5
(Top 10) institutional investors. The weights are assigned based on the ownership proportion,
measured as institutional investor q’s ownership in firm i divided by the total ownership owned
by Top 5 (Top 10) institutional owners in firm i.
3.3 The empirical model for H1 and H2
To examine whether multiple blockholdings are associated with audit fees and audit
report lags, we estimate the following regression:
DEPit = α0 + β1MULTI_HOLDit + α1WEIGHTit + α2AVG_RETit + α3AVG_CHURNit
+α4INTOWNit + α5LNATit + α6ASSETGROWTHit + α7BMit + α8AGEit
+α9GOINGCONit + α10DECit + α11INVRECit + α12BIG4it + α13SPECIALISTit
+ α14LOSSit + α15STDCFOit + α16BUS_SEGit+ α17FOREIGN_SEGit + α18MAit
+ α19LEVERAGEit + α20ROAit + industry and year fixed effects + ε (2)
The dependent variable is alternatively defined as LNAF (H1) and AULAG (H2). LNAF is
the natural logarithm of total audit fees and AULAG is the natural logarithm of days between
fiscal year-end date and the audit report date. MULTI_HOLD is an indicator variable that equals
one if the residual blockholding number owned by firm i’s largest institutional investor
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(TOP1_INTOWN) is higher than the median of the sample and zero otherwise. A positive
(negative) coefficient on MULTI_HOLD indicates that audit fees are higher (lower) and audit
report lag is longer (shorter) for firms whose largest institutional investor is a multiple
blockholder. Next, we include variables that control for characteristics of institutional investors.
WEIGHT is the value of investment in firm i relative to the total holding value managed by firm
i’s largest institutional investor. INTOWN is the percentage of ownership owned by institutional
investors. AVG_RET is the average buy-and-hold portfolio return for firm i’s largest institutional
investor over four quarters in year t. AVG_CHURN is the average churn rates of firm i’s largest
institutional investor over four quarters in year t. The churn rate is measured as aggregate
purchases plus aggregate sales minus the absolute value of net flows scaled by lagged equity
asset holding value (Gaspar et al. 2005).
We also include control variables for previously documented firm characteristics likely to
affect auditor behavior (Simunic 1980; Francis and Simon 1987; Geiger and Rama 2003;
Whisenant et al. 2003; Hay et al. 2006; Ghosh and Pawlewicz 2009; Ettredge et al. 2014). LNAT
is the natural logarithm of total assets. ASSET_GROWTH is the asset growth rate and is
measured as the difference between assets in year t and year t−1, scaled by lagged total assets.
BM , the book-to-market ratio, is measured as the book value of common equity divided by the
market value of common equity. AGE is the natural logarithm of the firm’s age in years.
GOINGCON is an indicator variable that equals one if a firm has received going concern
modifications in year t and zero otherwise. DEC is an indicator variable that equals one if a firm
has a December year-end and zero otherwise. INVREC is the amount of inventory and
receivables scaled by total assets. BIG4 is an indicator variable that equals one if a firm is
audited by a Big 4 auditor and zero otherwise. SPECIALIST is an indicator variable that equals
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one if a firm is audited by a specialist auditor and zero otherwise. We define a specialist auditor
as the one who collected the highest total fees in an SIC 2-digit industry. LOSS is an indicator
variable that equals one if a firm experiences a loss in year t and zero otherwise. STDCFO is the
standard deviation of cash flow from operations scaled by total assets in the previous 5 years.
BUS_SEG is the number of business segments. FOREIGN_SEG is the number of foreign
segments. MA is an indicator variable that equals one if a firm has merger and acquisition events
and zero otherwise. LEVERAGE is measured as total debt scaled by total assets. ROA is net
income scaled by total assets.
Finally, we include industry and year fixed effects to control for systematic variation in
audit fees across industries and years, and cluster standard errors by firm. All continuous
variables are winsorized at the 1% and 99 % levels to mitigate the effect of outliers.
3.4 The empirical models for H1a and H2a
To examine whether characteristics of multiple blockholders are associated with auditor
behavior, we estimate the following regression models:
DEP = α0 + β1SAME+ β1DIFF + Controls + ε (3)
DEP = α0 + β1LONG+ β1SHORT + Controls + ε (4)
In Equations (3) and (4), we replace MULTI_HOLD with proxies for the following
characteristics of firm i’s largest institutional investor: SAME, DIFF, LONG, and SHORT. We
first set these four indicator variables to zero if a firm’s largest institutional investor is not a
multiple blockholder (that is, MULTI_HOLD equals zero). Next, we check whether a firm’s
multiple blockholder (that is, MULTI_HOLD equals one) has the characteristic we are interested
in. Specifically, SAME equals one if firm i’s largest institutional investor has at least one
additional blockholding in another firm in the same SIC 2-digit industry during the previous
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three years and zero otherwise. DIFF equals one if firm i’s largest institutional investor has no
blockholding in other firms in the same SIC 2-digit industry during the previous three years and
zero otherwise. LONG equals one if firm i’s largest institutional investor has continuously served
as another portfolio firm’s blockholder for at least a year during the previous three years and zero
otherwise. SHORT equals one if firm i’s largest institutional investor has not continuously served
as another portfolio firm’s blockholder for at least a year in the previous three years and zero
otherwise.
A significant coefficient on SAME, DIFF, LONG, and SHORT supports H1a and H2a, in
which we predict that characteristics of institutional investors explain the variation in audit fees
and audit report lag. For example, a positive (negative) coefficient on SAME indicates that audit
fees are higher (lower) and the audit report lag is longer (shorter) for firms whose largest
institutional investor is a multiple blockholder and has additional blockholdings in other firms in
the same industry.
IV. Empirical results
4.1 Descriptive statistics
Table 2 presents the descriptive statistics. Columns (2) and (3) show the characteristics
for firms whose largest institutional investor owns a substantial number of blockholdings in the
market (that is, MULTI_HOLD =1) and for firms whose largest institutional investor does not
greatly cross-hold (that is, MULTI_HOLD =0), respectively. Column (4) reports the difference
between these groups. We find that audit fees are lower and audit report lags are longer in firms
with multiple blockholders. Interestingly, while Hay et al. (2006) summarize the large body of
literature and find that the dominant determining factor in audit pricing is client firm size, we do
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not find that these two groups are different in size. We further find that firms that are monitored
by multiple blockholders have lower leverage, lower profitability, higher book-to-market ratios,
and fewer segments. In addition, they are younger and are less likely to be audited by
reputational auditors. These univariate tests lend some support to the view that multiple
blockholders invest in firms where their monitoring helps the manager maximize shareholder
value (Brav et al. 2008).
[Insert Table 2 Here]
4.2 Regression results for H1 and H2
Table 3, Panel A presents the regression results from examining the association between
multiple blockholdings and auditor behavior. Column (1) reports the results for the firm
characteristic control variables only when the dependent variable is audit fees (LNAF).
Consistent with prior literature, we find that audit fees are higher for firms owned by
institutional investors (INTOWN = 0.147, t-statistic = 2.34), with larger assets (LNAT = 0.551, t-
statistic = 59.22), and that are older (AGE = 0.058, t-statistic = 3.05), have a December fiscal
year end (DEC = 0.093, t-statistic = 3.73), have a higher percentage of receivables over total
assets (INVREC = 0.925, t-statistic = 8.88), appoint reputational auditors (BIG4 = 0.148, t-
statistic = 3.46 ; SPECIALIST = 0.059, t-statistic = 3.18), report a loss (LOSS = 0.087, t-statistic=
3.68 ), have more business segments (BUS_SEG = 0.012, t-statistic = 3.27), and have more
foreign segments (FOREIGN_SEG = 0.020, t-statistic = 6.11). Audit fees are lower for firms
with a higher growth rate in assets (ASSETGROWTH = −0.138, t-statistic = –5.43) and with
higher profitability (ROA = −0.770, t-statistic = −5.35).
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Column (2) reports the regression results when we include MULTI_HOLD and variables
controlling for characteristics of institutional investors. The empirical results reveal that the
coefficient on MULTI_HOLD is not significant and that the coefficient on WEIGHT is
significantly positive (0.360, t-statistic = 1.98). This evidence indicates that audit fees are not
different between firms whose largest institutional investor cross-holds substantially in other
firms and firms whose largest institutional investor has a limited number of blockholdings;
however, audit fees increase when the firm accounts for a larger fraction of the largest
institutional investor’s portfolio. This finding is consistent with the view that the willingness to
pay auditors varies with the relative importance of stocks in institutional investors’ portfolio, and
thus firms impose different fee pressures on the auditor (Fich et al. 2015).
Next, we examine whether multiple blockholdings are associated with auditor effort and
present the results in Table 3, Panel B. Similar to the analysis above, we first run a regression
controlling for the firm characteristic variables only and use audit report lag as a dependent
variable (AULAG). Column (1) reveals that audit report lags are longer for firms that have a
higher growth rate in assets (ASSETGROWTH = 0.030, t-statistic = 3.16), have less growth
potential (BM = 0.081, t-statistic = 8.55), receive a going-concern opinion (GOINGCON = 0.195,
t-statistic = 4.72), have a December fiscal year end (DEC = 0.031, t-statistic = 3.93), report a loss
(LOSS = 0.017, t-statistic= 2.01 ), have M&A transactions (MA = 0.011, t-statistic = 2.10), and
have higher leverage (LEVERAGE = 0.089, t-statistic = 4.03). Audit report lags are shorter for
firms with more institutional investors (INTOWN = −0.074, t-statistic = −3.58), with larger assets
(LNAT = −0.047, t-statistic = −15.46), and with higher profitability (ROA = −0.176, t-statistic =
−3.88).
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Column (2) shows the results of the regression of both the test variable, MULTI_HOLD,
and control variables on audit report lags. The empirical results reveal that the coefficient on
MULTI_HOLD is significantly positive (0.016, t-statistic = 3.28), indicating that the audit report
lag is longer for a firm whose largest institutional investor owns a substantially larger number of
blockholdings in the market. Similar to the results in Panel A, we also find that the coefficient on
WEIGHT is significantly positive (0.102, t-statistic = 1.92).
Taken together, the results in Panels A and B indicate that auditors exert greater effort
and spend more time preparing audit reports for firms with multiple blockholders; however,
auditors do not charge higher fees for additional working hours. Our evidence is in line with the
concern that common ownership may influence pricing in an industry (Azar et al. 2018) and that
multiple blockholdings may hurt auditors’ profitability.
[Insert Table 3 Here]
4.3 Regression results for H1a and H2a
Table 4 reports the results for H1a and H2a, which propose that the association between
multiple blockholdings and auditor behavior varies with two characteristics of institutional
investors. We first examine whether financial investors’ industry knowledge plays a role in audit
fees and estimate Equation (3), in which we decompose MULTI_HOLD into same- and different-
industry multiple blockholding indicators (that is, SAME and DIFF). Panel A, Columns (1) and
(2) report the results when the dependent variable is defined as LNAF and AULAG, respectively.
We find that, while DIFF is marginally significant and positive (0.040, t-statistic = 1.68), SAME
is not significant (0.015, t-statistic = 2.94) in the audit fee model. We further find that both
SAME and DIFF (SAME = 0.015, t-statistic = 2.94; DIFF = 0.020, t-statistic = 2.59) are
20
significantly positive in the audit report lag model. These results indicate that auditors exert
greater effort both for firms whose largest institutional investors cross-hold in the same industry
and for firms whose largest institutional investors do not have additional blockholdings in the
same industry; however, auditors are compensated for additional working hours only for firms
whose multiple blockholders do not cross-hold in the same industry. These results show that the
fee pressure of institutions’ multiple blockholdings comes primarily from the information
advantage that multiple blockholders acquire through investing in other firms in the same
industry.
Next, we focus on investment horizons and estimate Equation (4), in which we
decompose MULTI_HOLD into long- and short-term multiple blockholding indicators (that is,
LONG and SHORT). We find that both LONG and SHORT are insignificant (LONG= −0.006, t-
statistic = −0.41; SHORT = 0.040, t-statistic = 0.71) when the dependent variable is LNAF.
However, LONG is significantly positive (0.016, t-statistic = 3.27) when the dependent variable
is AULAG. These results indicate that while auditors do not adjust audit fees according to
investment horizons, they work longer hours for their reports for firms whose largest institutional
investor is a long-term investor. These results show that the fee pressure of multiple
blockholdings comes primarily from the information advantage that multiple blockholders
acquire through accumulated investment experience.
Collectively, the results in Table 4 support H1a and H2a. We find that the association
between multiple blockholdings and auditor behavior varies with characteristics of multiple
blockholders. Our evidence is consistent with the notion that the information advantage acquired
through investing in other firms in the same industry and through investing for a long horizon
21
enables multiple blockholders to place fee pressure on auditors, and that auditors spend more
time preparing reports in the presence of more experienced multiple blockholders.
[Insert Table 4 Here]
V. Additional Analyses – Exploring the Association among Financial Positions, Multiple
Blockholdings, and Auditor Behavior
To enhance the understanding of the association between multiple blockholdings and
auditor behavior, we extend prior literature and examine whether a firm’s financial position plays
a role in the associations we document in Section 4. Regarding financial position, we focus on
firm leverage and profitability and expect that the association between multiple blockholdings
and audit fees and auditor effort varies across firms’ financial position.
Jensen (1986) indicates that because firms issuing bonds need to make periodic payments,
bonds reduce managers’ control over free cash flow and their incentives to engaging in non-
optimal projects. In support of Jensen (1986), empirical studies suggest that the use of debt
mitigates agency costs (Harris and Raviv 1991; Bathala et al. 1994) and that auditors react and
adjust audit fees based on firms’ leverage ratio (Gul and Tsui 2001; Gul and Tsui 1997).
Following these studies, we predict that because a higher debt ratio is associated with lower
agency costs, multiple blockholders should be less concerned about managers’ opportunistic
behavior and be less likely to demand high-quality audits. In addition, auditors face lower
inherent risks and may be more willing to reduce audit fees.
Next, we extend two studies: (1) Brav et al. (2008), who suggest that institutional
investors serve a monitoring role to reduce agency costs and to improve ex-post operating
performances and (2) Cassell et al. (2018), who document that auditors’ engagement risk is
22
higher in the presence of institutional owners. We examine whether better performance, which is
associated with greater monitoring effort from institutional owners and lower litigation risk,
reduces audit fees and auditor effort.
To examine whether the association between multiple blockholdings and audit fees varies
with a firm’s financial position, we add interaction terms MULTI_HOLD×LEVERAGE and
MULTI_HOLD×ROA into Equation (2); SAME×LEVERAGE, SAME×ROA, DIFF×LEVERAGE
and DIFF×ROA into Equation (3); and LONG×LEVERAGE, LONG×ROA, SHORT×LEVERAGE,
and SHORT×ROA into Equation (4).
Table 5, Panel A presents the empirical results from estimating Equation (2). Column (1)
reports the results for the audit fee model. Consistent with prior literature, we find that audit fees
are higher for firms with higher leverage and lower profitability. We find that, different from the
insignificant coefficient on MULTI_HOLD in the audit report lag model as reported in Table 3,
in Column (2), MULTI_HOLD is significantly positive. Furthermore, we find that the interaction
terms MULTI_HOLD×LEVERAGE and MULTI_HOLD×ROA, are both significantly negative.
These results indicate that higher profitability and higher leverage mitigate the positive
association between multiple blockholdings and audit fees. These results are consistent with the
notion that multiple blockholders perceive debts as mitigating agency costs (Harris and Raviv
1991; Bathala et al. 1994) and thus firms with multiple blockholders are less willing to pay
higher fees in the presence of reduced agency costs. The results are also consistent with the view
that while auditors perceive the litigation risk to be high for firms with multiple blockholders, the
risk decreases with profitability. Column (2) reports the results for the audit report lag model.
We find that the interaction term MULTI_HOLD×ROA is significantly negative, confirming that
23
the fee reduction associated with higher profitability in firms with multiple blockholders is
driven by reduced working hours.
Next, we investigate whether the association between the characteristics of institutional
investors and auditor behavior varies with a firm’s financial position. Table 5, Panel B presents
the empirical results from estimating Equation (3). Regarding industry knowledge, we find that
SAME×LEVERAGE and SAME×ROA are both significantly negative when the dependent
variable is LNAF, and that SAME×ROA is significantly negative when the dependent variable is
AULAG. However, the results are weaker when we focus on institutional investors without such
knowledge. Specifically, we find that only DIFF×LEVERAGE is significantly negative in the
audit fee model and that DIFF×LEVERAGE and DIFF×ROA are both insignificant. Panel C
presents the empirical results from estimating Equation (4), in which we focus on investment
horizons. Similar to the findings for industry knowledge in Panel B, we find that
LONG×LEVERAGE and LONG×ROA are both significantly negative in the audit fee model, and
that LONG×ROA is significantly negative in the audit report lag model.
Taken together, these results are consistent with the findings in Table 4, which suggest that
the fee pressure of multiple blockholdings comes primarily from industry expertise and
accumulated monitoring experience. These results indicate that auditors perceive profitable firms
monitored by multiple blockholders with industry expertise and long monitoring experience to
have lower inherent risks, and thus auditors exert less audit effort and charge lower audit fees.
The results also indicate that more experienced multiple blockholders perceive higher leverage to
be associated with less severe agency problems, and thus their willingness to pay for auditing
decreases, pushing their investee firms to negotiate with auditors more aggressively. However,
24
we do not find evidence to suggest that auditors exert lower effort in response to reduced audit
fees, as auditors are still responsible to creditors.
[Insert Table 5 Here]
VI. Robustness Checks
6.1 Alternative measure of multiple blockholdings
In this section, we re-assess the association between multiple blockholdings and auditor
behavior using two alternative measures of multiple blockholdings. We redefine the largest
institutional investor in Equations (2), (3), and (4) using TOP5_INTOWN and TOP10_INTOWN
( discussed in Section 3.2).
Table 6, Panel A presents the results from estimating our regression models based on a
firm's Top 5 institutional investors and Panel B based on the Top 10 institutional investors.
Similar to the results in Table 3, we find that MULTI_HOLD is insignificant when the dependent
variable is LNAF and significantly positive when the dependent variable is AULAG.
We also repeat the analyses in Table 3 using the original value of TOP1_INTOWN, the
residual of multiple blockholdings at the investee firm-year level. Untabulated results reveal that
TOP1_INTOWN is insignificant in the audit fee model and is significantly positive in the audit
report lag model. In other words, the results based on an indicator variable (Table 3) are similar
to those based on original residuals.
Overall, the results in Table 6 confirm our main inferences that auditors exert greater
effort for firms with multiple blockholders; however, we do not find evidence to suggest that
auditors charge higher audit fees for additional working hours.
[Insert Table 6 Here]
25
6.2 Alternative sample – firms with same reporting schedules
Our main sample consists of firms with different filing periods, which raises the concern
that different filing schedules may bias the results. To address this concern, we restrict our
sample to firms with the same filing schedules. First, we delete non-accelerated filer firms, as
they are exempted from SOX Section 404 (b) compliance and are required to file annual reports
within 90 days after the fiscal year ends. Next, we delete accelerated filer firms that do not have
information on the opinion of internal control weakness. We further delete accelerated filer firms
with market capitalization greater than $700 million if their fiscal year ends after December 15,
2006, because these firms have a deadline of 60 days. After these procedures, our subsample
consists of firms having the same filing period of 75 days.
Table 7 presents the results using the subsample. We again find that MULTI_HOLD is
insignificant in the audit fee model and is significantly positive in the audit report lag model.
Overall, the sensitivity tests using the subsample suggest that our main findings are unlikely to
be driven by a subset of firms with different reporting schedules.
[Insert Table 7 Here]
VII. Conclusion
This paper examines the association between multiple blockholdings and auditor
behavior. In particular, we examine whether auditors charge different fees and exert different
levels of effort for firms monitored by institutional investors with substantial cross-holdings in
the market. Using a sample of S&P 1500 firms from 2003 to 2017 and the residual approach
developed by Kang et al. (2018), we find that while auditors spend more time preparing audit
26
reports for firms monitored by multiple blockholders, auditors do not charge higher fees. This
finding is consistent with the notion that cross-holding enables institutional investors to acquire
more governance-relevant information and monitoring experience, which gives them an
information advantage with which to bargain more aggressively with auditors.
Next, we examine whether the characteristics of multiple blockholders explain the
association between multiple blockholdings and auditor behavior. We find that firms with more-
experienced multiple blockholders place great fee pressure on auditors. Specifically, auditors do
not charge higher audit fees for longer working hours for clients monitored by multiple
blockholders (1) who also serve as blockholders in other firms in the same industry and (2) who
hold shares for a long horizon. In other words, industry expertise and the accumulated
monitoring experience of multiple blockholders create fee pressure for auditors in the fee
negotiation process. We further find that firms with more experienced multiple blockholders pay
lower audit fees when they report higher returns on assets and higher leverage. However, we do
not find such evidence for firms with less-experienced multiple blockholders. These results
provide additional evidence to suggest that firms monitored by institutional investors with more
experience know how to bargain more effectively based on financial position.
27
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TABLE 1
Annual and Industry Distributions
Panel A: Annual distribution
Year Number of observations
2003 933
2004 923
2005 919
2006 930
2007 871
2008 929
2009 926
2010 931
2011 949
2012 956
2013 968
2014 975
2015 978
2016 1005
2017 829
Total 14,022
33
TABLE 1 (continued)
Panel B: Industry distribution
Industry SIC Number of observations
Agriculture, forestry, and fishing 01-09 90
Mining 10-14 585
Construction 15-17 250
Manufacturing 20-39 7,215
Transportation, communications, electric,
gas, and sanitary Services
40-49 1,594
Wholesale trade 50-51 611
Retail trade 52-59 1,318
Service 70-89 2,359
Total 14,022
Panel A presents the number of observations by year and Panel B by industry. The sample
consists of 14,022 firm-year observations from 2003 to 2017.
34
TABLE 2
Descriptive Statistics
(1)
Full sample
(N=14,022)
(2)
MULTI_HOLD =1
(N=7,019)
(3)
MULTI_HOLD =0
(N=7,003)
(4)
Variable Mean Median Mean Median Mean Median Diff
LNAF 14.564 14.483 14.382 14.331 14.746 14.661 -0.363***
AULAG 4.009 4.043 4.030 4.060 3.989 4.025 0.041***
MULTI_HOLD 0.501 1.000
WEIGHT 0.012 0.001 0.018 0.004 0.007 0.000 0.012***
AVG_RET 0.187 0.039 0.304 0.043 0.069 0.035 0.234***
AVG_CHURN 0.146 0.129 0.181 0.154 0.111 0.095 0.071***
INTOWN 0.819 0.842 0.821 0.842 0.816 0.841 0.004***
LNAT 7.801 7.642 7.483 7.334 8.119 7.966 -0.636
ASSETGROWTH 0.094 0.058 0.087 0.055 0.100 0.060 -0.014***
BM 0.470 0.412 0.502 0.444 0.438 0.378 0.064***
AGE 3.266 3.258 3.194 3.178 3.339 3.332 -0.145***
GOINGCON 0.001 0.000 0.001 0.000 0.001 0.000 0.000***
DEC 0.665 1.000 0.660 1.000 0.671 1.000 -0.011
INVREC 0.247 0.225 0.252 0.230 0.243 0.218 0.009
BIG4 0.939 1.000 0.934 1.000 0.945 1.000 -0.012***
SPECIALIST 0.337 0.000 0.327 0.000 0.347 0.000 -0.020***
LOSS 0.125 0.000 0.143 0.000 0.107 0.000 0.036***
STDCFO 0.043 0.033 0.045 0.036 0.040 0.031 0.005***
BUS_SEG 3.559 3.000 3.367 3.000 3.751 3.000 -0.384***
FOREIGN_SEG 2.906 2.000 2.740 2.000 3.072 2.000 -0.332***
MA 0.190 0.000 0.186 0.000 0.194 0.000 -0.008***
LEVERAGE 0.190 0.181 0.178 0.163 0.202 0.195 -0.023***
ROA 0.053 0.055 0.048 0.052 0.058 0.058 -0.010***
This table presents descriptive statistics of the variables in the regressions. ***, ** and * denote statistical significance at the 1%, 5%
and 10% levels, respectively, based on t-statistics for difference in means.
35
TABLE 3
The Association between Multiple Blockholdings and Auditor Behavior
Panel A: Dependent variable: LNAF
Variable
Pred.
Sign Coeff. t-stat Coeff. t-stat
INTOWN +/− 0.147 (2.34)** 0.146 (2.33)**
LNAT + 0.551 (59.22)*** 0.550 (58.84)***
ASSETGROWTH − −0.138 (−5.43)*** −0.137 (−5.39)***
BM − −0.049 (−1.62) −0.048 (−1.57)
AGE + 0.058 (3.05)*** 0.056 (2.95)***
GOINGCON + 0.282 (1.64) 0.285 (1.67)*
DEC + 0.093 (3.73)*** 0.092 (3.71)***
INVREC + 0.925 (8.88)*** 0.929 (8.92)***
BIG4 + 0.148 (3.46)*** 0.148 (3.47)***
SPECIALIST + 0.059 (3.18)*** 0.059 (3.21)***
LOSS + 0.087 (3.68)*** 0.085 (3.60)***
STDCFO + −0.055 (−0.19) −0.065 (−0.23)
BUS_SEG + 0.012 (3.27)*** 0.012 (3.31)***
FOREIGN_SEG + 0.020 (6.11)*** 0.020 (6.12)***
MA + 0.022 (1.48) 0.021 (1.43)
LEVERAGE + 0.085 (1.21) 0.088 (1.25)
ROA − −0.770 (−5.35)*** −0.782 (−5.43)***
MULTI_HOLD +/− −0.005 (−0.39)
WEIGHT 0.360 (1.98)**
AVG_RET 0.006 (1.37)
AVG_CHURN −0.097 (−1.32)
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.47% 80.49%
N 14,002 14,002 (continued)
36
TABLE 3 (continued)
Panel B: Dependent variable: AULAG
Variable
Pred.
Sign
Coeff. t-stat Coeff. t-stat
INTOWN +/− −0.074 (−3.58)*** −0.076 (−3.71)***
LNAT + −0.047 (−15.46)*** −0.047 (−15.23)***
ASSETGROWTH − 0.030 (3.16)*** 0.032 (3.33)***
BM − 0.081 (8.55)*** 0.080 (8.48)***
AGE + 0.009 (1.48) 0.008 (1.35)
GOINGCON + 0.195 (4.72)*** 0.199 (4.84)***
DEC + 0.031 (3.93)*** 0.030 (3.90)***
INVREC + 0.034 (1.18) 0.034 (1.19)
BIG4 + −0.011 (−0.75) −0.011 (−0.74)
SPECIALIST + 0.007 (1.17) 0.007 (1.20)
LOSS + 0.017 (2.01)** 0.016 (1.97)**
STDCFO + 0.058 (0.67) 0.065 (0.76)
BUS_SEG + 0.001 (0.82) 0.001 (0.87)
FOREIGN_SEG + 0.001 (0.53) 0.001 (0.55)
MA + 0.011 (2.10)** 0.011 (2.06)**
LEVERAGE + 0.089 (4.03)*** 0.087 (3.95)***
ROA − −0.176 (−3.88)*** −0.176 (−3.89)***
MULTI_HOLD +/− 0.016 (3.28)***
WEIGHT 0.102 (1.92)*
AVG_RET 0.001 (0.85)
AVG_CHURN −0.049 (−1.84)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 29.21% 29.38%
N 14,022 14,022
This table presents the regression results from estimating the association between multiple
blockholdings and auditor behavior. Panel A presents the results when the dependent variable is
the natural logarithm of audit fees (LNAF). Panel B presents the results when the dependent
variable is the natural logarithm of days between fiscal year-end date and the audit report date
(AULAG). ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels,
respectively, based on two-tailed tests of significance. Standard errors are clustered by firm.
37
TABLE 4
Characteristics of Multiple Blockholdings and Auditor Behavior
Panel A: MULTI_HOLD is partitioned by industry expertise
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.148 (2.36)** −0.076 (−3.70)***
LNAT 0.550 (58.93)*** −0.047 (−15.21)***
ASSETGROWTH −0.137 (−5.41)*** 0.032 (3.33)***
BM −0.049 (−1.59) 0.080 (8.48)***
AGE 0.056 (2.94)*** 0.008 (1.35)
GOINGCON 0.289 (1.69)* 0.199 (4.84)***
DEC 0.091 (3.68)*** 0.030 (3.89)***
INVREC 0.929 (8.92)*** 0.034 (1.18)
BIG4 0.147 (3.46)*** −0.011 (−0.74)
SPECIALIST 0.059 (3.21)*** 0.007 (1.20)
LOSS 0.085 (3.60)*** 0.016 (1.97)**
STDCFO −0.059 (−0.21) 0.066 (0.76)
BUS_SEG 0.012 (3.28)*** 0.001 (0.87)
FOREIGN_SEG 0.020 (6.09)*** 0.001 (0.55)
MA 0.021 (1.46) 0.011 (2.07)**
LEVERAGE 0.085 (1.21) 0.087 (3.94)***
ROA −0.784 (−5.44)*** −0.176 (−3.89)***
SAME −0.015 (−1.04) 0.015 (2.94)***
DIFF 0.040 (1.68)* 0.020 (2.59)***
WEIGHT 0.291 (1.63) 0.096 (1.77)*
AVG_RET 0.007 (1.49) 0.001 (0.87)
AVG_CHURN −0.101 (−1.37) −0.049 (−1.85)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.51% 29.39%
N 14,022 14,022
(continued)
38
TABLE 4 (continued)
Panel B: MULTI_HOLD is partitioned by investment horizon
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.147 (2.34)** −0.076 (−3.70)***
LNAT 0.550 (58.84)*** −0.047 (−15.23)***
ASSETGROWTH −0.137 (−5.39)*** 0.032 (3.33)***
BM −0.048 (−1.57) 0.080 (8.48)***
AGE 0.056 (2.95)*** 0.008 (1.35)
GOINGCON 0.285 (1.67)* 0.199 (4.84)***
DEC 0.092 (3.71)*** 0.030 (3.90)***
INVREC 0.929 (8.92)*** 0.034 (1.19)
BIG4 0.148 (3.47)*** −0.011 (−0.74)
SPECIALIST 0.059 (3.22)*** 0.007 (1.20)
LOSS 0.085 (3.60)*** 0.016 (1.97)*
STDCFO −0.065 (−0.23) 0.065 (0.76)
BUS_SEG 0.012 (3.30)*** 0.001 (0.87)
FOREIGN_SEG 0.020 (6.13)*** 0.001 (0.55)
MA 0.021 (1.43) 0.011 (2.06)**
LEVERAGE 0.088 (1.25) 0.087 (3.95)***
ROA −0.783 (−5.44)*** −0.176 (−3.89)***
LONG −0.006 (−0.41) 0.016 (3.27)***
SHORT 0.040 (0.71) 0.020 (0.89)
WEIGHT 0.355 (1.96)* 0.102 (1.91)*
AVG_RET 0.006 (1.42) 0.001 (0.86)
AVG_CHURN −0.103 (−1.39) −0.050 (−1.85)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.50% 29.38%
N 14,022 14,022
This table presents the regression results from estimating the association between characteristics
of multiple blockholders and auditor behavior. Panel A (B) examines whether industry
knowledge (investment horizons) is associated with auditor behavior. Column (1) presents the
results when the dependent variable is the natural logarithm of audit fees (LNAF). Column (2)
presents the results when the dependent variable is the natural logarithm of days between fiscal
year-end date and the audit report date (AULAG). ***, **, and * denote statistical significance at
the 1%, 5%, and 10% levels, respectively, based on two-tailed tests of significance. Standard
errors are clustered by firm.
39
TABLE 5
Additional Analysis: Exploring the Association among Financial Position, Multiple
Blockholdings, and Auditor Behavior
Panel A: Financial position, multiple blockholdings, and auditor behavior
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.149 (2.39)** −0.075 (−3.67)***
LNAT 0.550 (58.92)*** −0.047 (−15.25)***
ASSETGROWTH −0.135 (−5.33)*** 0.032 (3.34)***
BM −0.045 (−1.50) 0.080 (8.49)***
AGE 0.056 (2.92)*** 0.008 (1.34)
GOINGCON 0.294 (1.72)* 0.200 (4.86)***
DEC 0.093 (3.73)*** 0.030 (3.92)***
INVREC 0.927 (8.92)*** 0.034 (1.19)
BIG4 0.148 (3.48)*** −0.011 (−0.75)
SPECIALIST 0.059 (3.20)*** 0.007 (1.19)
LOSS 0.084 (3.57)*** 0.016 (1.89)*
STDCFO −0.069 (−0.24) 0.063 (0.73)
BUS_SEG 0.012 (3.31)*** 0.001 (0.88)
FOREIGN_SEG 0.020 (6.16)*** 0.001 (0.55)
MA 0.020 (1.40) 0.011 (2.09)**
LEVERAGE 0.218 (2.72)*** 0.087 (3.05)***
ROA −0.614 (−3.76)*** −0.129 (−2.39)**
MULTI_HOLD 0.059 (2.67)*** 0.021 (2.57)**
MULTI_HOLD×LEVERAGE −0.255 (−3.35)*** 0.000 (0.01)
MULTI_HOLD×ROA −0.316 (−2.14)** −0.091 (−1.81)*
WEIGHT 0.381 (2.11)** 0.103 (1.92)*
AVG_RET 0.006 (1.38) 0.001 (0.88)
AVG_CHURN −0.093 (−1.28) −0.049 (−1.85)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.54% 29.41%
N 14,022 14,022
(continued)
40
TABLE 5 (continued)
Panel B: Financial positions, industry knowledge, and auditor behavior
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.151 (2.42)** −0.075 (−3.66)***
LNAT 0.551 (58.99)*** −0.047 (−15.22)***
ASSETGROWTH −0.135 (−5.34)*** 0.031 (3.29)***
BM −0.046 (−1.52) 0.080 (8.47)***
AGE 0.056 (2.91)*** 0.008 (1.32)
GOINGCON 0.297 (1.74)* 0.203 (4.97)***
DEC 0.092 (3.70)*** 0.030 (3.93)***
INVREC 0.926 (8.91)*** 0.034 (1.21)
BIG4 0.147 (3.46)*** −0.011 (−0.75)
SPECIALIST 0.059 (3.20)*** 0.007 (1.20)
LOSS 0.084 (3.57)*** 0.016 (1.90)*
STDCFO −0.061 (−0.22) 0.063 (0.72)
BUS_SEG 0.012 (3.28)*** 0.001 (0.88)
FOREIGN_SEG 0.020 (6.14)*** 0.001 (0.55)
MA 0.021 (1.42) 0.011 (2.10)**
LEVERAGE 0.220 (2.74)*** 0.087 (3.06)***
ROA −0.614 (−3.76)*** −0.128 (−2.37)**
SAME 0.049 (2.16)** 0.023 (2.74)***
SAME×LEVERAGE −0.257 (−3.17)*** −0.015 (−0.51)
SAME×ROA −0.314 (−2.06)** −0.099 (−1.84)*
DIFF 0.119 (2.99)*** 0.009 (0.65)
DIFF×LEVERAGE −0.302 (−2.29)** 0.068 (1.41)
DIFF×ROA −0.354 (−1.40) −0.050 (−0.57)
WEIGHT 0.309 (1.74)* 0.096 (1.77)*
AVG_RET 0.007 (1.50) 0.002 (0.90)
AVG_CHURN −0.097 (−1.33) −0.049 (−1.85)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 14,022 14,022
N 80.56% 29.44%
(continued)
41
TABLE 5 (continued)
Panel C: Financial positions, investment horizons, and auditor behavior
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.150 (2.39)** −0.075 (−3.67)***
LNAT 0.550 (58.90)*** −0.047 (−15.25)***
ASSETGROWTH −0.135 (−5.33)*** 0.032 (3.35)***
BM −0.045 (−1.49) 0.080 (8.49)***
AGE 0.056 (2.92)*** 0.008 (1.33)
GOINGCON 0.294 (1.72)* 0.200 (4.86)***
DEC 0.093 (3.73)*** 0.030 (3.92)***
INVREC 0.927 (8.93)*** 0.034 (1.19)
BIG4 0.148 (3.47)*** −0.011 (−0.75)
SPECIALIST 0.059 (3.20)*** 0.007 (1.20)
LOSS 0.084 (3.58)*** 0.016 (1.90)*
STDCFO −0.067 (−0.24) 0.063 (0.73)
BUS_SEG 0.012 (3.30)*** 0.001 (0.88)
FOREIGN_SEG 0.020 (6.17)*** 0.001 (0.55)
MA 0.021 (1.40) 0.011 (2.09)**
LEVERAGE 0.218 (2.72)*** 0.087 (3.05)***
ROA −0.614 (−3.76)*** −0.129 (−2.38)**
LONG 0.059 (2.65)*** 0.021 (2.53)**
LONG×LEVERAGE −0.255 (−3.35)*** 0.001 (0.05)
LONG×ROA −0.312 (−2.11)** −0.091 (−1.79)*
SHORT 0.119 (1.10) 0.041 (1.45)
SHORT×LEVERAGE −0.232 (−0.74) −0.070 (−0.65)
SHORT×ROA −0.640 (−0.91) −0.108 (−0.70)
WEIGHT 0.376 (2.08)** 0.102 (1.90)*
AVG_RET 0.006 (1.43) 0.002 (0.90)
AVG_CHURN −0.100 (−1.35) −0.050 (−1.87)*
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.54% 29.41%
N 14,022 14,022
This table presents the regression results from estimating the association among financial
position, multiple blockholdings, and auditor behavior. Panel A examines whether financial
position plays a role in the association between multiple blockholdings and auditor behavior.
Panels B and C focus on industry knowledge and investment horizons, respectively. Column (1)
presents the results when the dependent variable is the natural logarithm of audit fees (LNAF),
Column (2) the natural logarithm of days between fiscal year-end date and the audit report date
(AULAG). ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels,
respectively, based on two-tailed tests of significance. Standard errors are clustered by firm.
42
TABLE 6
Sensitivity Test: Alternative Measures of Multiple Blockholdings
Panel A: MULTI_HOLD is based on TOP5_INTOWN
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.145 (2.31)** −0.077 (−3.73)***
LNAT 0.548 (58.60)*** −0.047 (−15.02)***
ASSETGROWTH −0.139 (−5.53)*** 0.031 (3.25)***
BM −0.043 (−1.40) 0.081 (8.44)***
AGE 0.057 (3.00)*** 0.008 (1.37)
GOINGCON 0.276 (1.62) 0.195 (4.70)***
DEC 0.091 (3.65)*** 0.030 (3.91)***
INVREC 0.935 (8.98)*** 0.035 (1.24)
BIG4 0.148 (3.46)*** −0.011 (−0.75)
SPECIALIST 0.059 (3.22)*** 0.007 (1.16)
LOSS 0.082 (3.50)*** 0.016 (1.96)*
STDCFO −0.103 (−0.36) 0.057 (0.66)
BUS_SEG 0.012 (3.30)*** 0.001 (0.85)
FOREIGN_SEG 0.020 (6.09)*** 0.001 (0.51)
MA 0.021 (1.45) 0.011 (2.06)**
LEVERAGE 0.092 (1.31) 0.090 (4.04)***
ROA −0.781 (−5.45)*** −0.176 (−3.89)***
MULTI_HOLD −0.019 (−1.16) 0.009 (1.69)*
WEIGHT 1.139 (2.74)*** 0.295 (2.30)**
AVG_RET 0.006 (0.53) 0.002 (0.40)
AVG_CHURN 0.054 (0.37) −0.052 (−1.05)
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.51% 29.30%
N 14,022 14,022
(continued)
43
TABLE 6 (continued)
Panel B: MULTI_HOLD is based on TOP10_INTOWN
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.140 (2.24)** −0.079 (−3.83)***
LNAT 0.549 (58.40)*** −0.047 (−15.04)***
ASSETGROWTH −0.142 (−5.62)*** 0.031 (3.22)***
BM −0.043 (−1.41) 0.080 (8.43)***
AGE 0.060 (3.13)*** 0.008 (1.40)
GOINGCON 0.268 (1.57) 0.195 (4.61)***
DEC 0.092 (3.69)*** 0.030 (3.92)***
INVREC 0.935 (8.97)*** 0.035 (1.22)
BIG4 0.147 (3.45)*** −0.011 (−0.77)
SPECIALIST 0.060 (3.24)*** 0.007 (1.14)
LOSS 0.082 (3.50)*** 0.016 (1.98)**
STDCFO −0.114 (−0.40) 0.063 (0.73)
BUS_SEG 0.012 (3.31)*** 0.001 (0.90)
FOREIGN_SEG 0.020 (6.08)*** 0.001 (0.50)
MA 0.022 (1.50) 0.011 (2.05)**
LEVERAGE 0.086 (1.22) 0.089 (4.04)***
ROA −0.769 (−5.36)*** −0.174 (−3.86)***
MULTI_HOLD −0.007 (−0.43) 0.016 (2.73)***
WEIGHT 1.400 (2.09)** 0.427 (2.10)**
AVG_RET −0.001 (−0.06) 0.001 (0.17)
AVG_CHURN 0.291 (1.65)* −0.063 (−1.08)
Fixed effects Industry/Year Industry/Year
Adjusted R2 80.50% 29.33%
N 14,022 14,022
This table presents the regression results using alternative measures of multiple blockholdings,
which is defined based on the Top 5 institutional investors in Panel A and the Top 10
institutional investors in Panel B. ***, **, and * denote statistical significance at the 1%, 5%,
and 10% levels, respectively, based on two-tailed tests of significance. Standard errors are
clustered by firm.
44
TABLE 7
Sensitivity Test: An Alternative Sample with the Same Reporting Schedules
(1)
Dependent variable:
LNAF
(2)
Dependent variable:
AULAG
Variable Coeff. t-stat Coeff. t-stat
INTOWN 0.167 (2.03)** −0.008 (−0.24)
LNAT 0.531 (40.18)*** −0.048 (−9.72)***
ASSETGROWTH −0.185 (−3.92)*** 0.025 (1.20)
BM −0.107 (−3.30)*** 0.035 (2.73)***
AGE 0.036 (1.43) −0.001 (−0.14)
GOINGCON 0.298 (1.80)* 0.452 (3.45)***
DEC 0.050 (1.54) 0.004 (0.34)
INVREC 0.658 (5.70)*** 0.027 (0.61)
BIG4 0.183 (3.86)*** −0.014 (−0.76)
SPECIALIST 0.043 (1.63) 0.016 (1.74)*
LOSS 0.118 (3.70)*** 0.038 (2.78)***
STDCFO −0.174 (−0.46) 0.070 (0.62)
BUS_SEG 0.021 (3.53)*** 0.003 (1.39)
FOREIGN_SEG 0.021 (3.71)*** 0.000 (0.23)
MA 0.001 (0.03) 0.007 (0.72)
LEVERAGE −0.005 (−0.05) 0.060 (1.60)
ROA −0.538 (−3.84)*** −0.129 (−2.33)**
MULTI_HOLD 0.031 (1.52) 0.029 (3.51)***
WEIGHT 0.348 (1.10) 0.206 (1.96)*
AVG_RET 0.172 (1.65) −0.033 (−0.72)
AVG_CHURN −0.139 (−1.32) −0.059 (−1.34)
Fixed effects Industry/Year Industry/Year
Adjusted R2 73.11% 16.95%
N 3,775 3,775
This table presents the regression results using an alternative sample containing firms with the
same reporting schedules (75 days after the fiscal year ends). ***, **, and * denote statistical
significance at the 1%, 5%, and 10% levels, respectively, based on two-tailed tests of
significance. Standard errors are clustered by firm.