Major institutional ownership and audit quality: Do institutional investors monitor firm management? A study of corporate governance

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Abstract

Institutional ownership grows significantly. Institutional investors are considered sophisticated market participants who monitor firm management. Institutional investors are anticipated to interfere in corporate governance by adopting a monitoring role, which can influence the quality of audit. While research on the monitoring role of institutional investors has fostered, empirical studies document either a positive (Ali et al., 2024) or a negative (Lemma et al., 2018) impact of institutional ownership on audit quality. This study aims to investigate the nature of this impact on audit quality in the United Kingdom (UK) setting. The UK capital market attracts significant funds from institutional investors. In the context of this study, two different audit quality metrics are applied, namely a) real earnings management and b) accrual earnings management. The sample comprised listed, non-financial firms on the FTSE All-Share Index. The sampling period spans the years 2012 to 2022. Results deriving from panel regressions document a statistically significant negative relationship between both earnings management strategies and major institutional ownership. Therefore, institutional ownership is associated with a positive impact on audit quality. Interestingly, no auditor size effect is found. Board-related corporate governance variables are not found to contribute to audit quality. These results could imply a substitutive role of institutional ownership (Guest, 2008) when audit quality is considered. These findings could serve as a valuable input for the UK regulatory authorities’ initiatives in a constantly changing audit market.

Keywords: Audit Quality, Earnings Management, Real Earnings Management, Abnormal Current Accruals, Major Institutional Ownership

Authors’ individual contribution: Conceptualization — G.C.S. and M.I.K.; Methodology — G.C.S. and M.I.K.; Software — G.C.S.; Validation — G.C.S.; Formal Analysis — G.C.S. and M.I.K.; Investigation — G.C.S.; Resources — G.C.S.; Data Curation — G.C.S.; Writing — Original Draft — G.C.S. and M.I.K.; Writing — Review & Editing — G.C.S. and M.I.K.; Visualization — G.C.S. and M.I.K.; Supervision — M.I.K.; Project Administration — M.I.K.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M41, M42, M48

Received: 13.04.2025
Revised: 16.07.2025; 12.11.2025
Accepted: 02.12.2025
Published online: 04.12.2025

How to cite this paper: Simitsis, G. C., & Kyriakou, M. I. (2025). Major institutional ownership and audit quality: Do institutional investors monitor firm management? A study of corporate governance [Special issue]. Journal of Governance and Regulation, 14(4), 390–400. https://doi.org/10.22495/jgrv14i4siart15