Ownership composition and non-audit service fees

This study examines the empirical relationship between the institutional stock ownership and the relative level of non-audit service fees. We suggest that the presence of sophisticated investors like institutional shareholders determines the effectiveness of stockholder monitoring of corporate affairs including audit and non-audit management process. Those shareholders induce firms to reduce the level of non-audit service purchase as a safeguard against auditor independence problem. The regression analysis shows that institutional stock ownership is negatively related to the non-audit fee ratio. Further, a two-stage least squares analysis disentangles the endogeneity driven ambiguity existing in a negative relationship between institutional stock ownership and non-audit fee ratio. The result is consistent with the view that institutional shareholders actively monitor corporate affairs and influence managerial decision to purchase non-audit service from incumbent auditors in order to ensure that auditors maintain their objectivity in assurance functions. The results hold in various specification tests.