The Effect of Local Holdings on Audit Policy and Outcomes

Abstract

This paper examines whether local block holdings are associated with

audit policy and outcomes. For local investors are long-term investors and

they tend to invest a larger portion of their total investment in local companies,

I posit that local block holders will be dedicated investors and have

strong incentives to monitor management. Consistently I find that companies

with local block holders are less likely to have unclean/going-concern

opinions, and more likely to have long-term relationships with auditors.

In addition, although I find weak evidence that the existence of local block

investors affects audit fees, I do not observe any significant difference of

audit fees between firms with local block holdings and firms with nonlocal

block holdings. Overall, this paper shows that information advantage of

local investors can have real effects on audit process through monitoring

activities.