The Effects of Foreign Monitoring on Audit Quality: Evidence from Korea

Abstract

This paper examines (1) whether the presence of foreign shareholders and foreign directors enhances audit quality using metrics such as auditor size and audit fees; and (2) whether the relationship between foreign monitors and audit quality is particularly greater when agency problems between shareholders and managers increase. Our dataset includes 1,574 non-financial companies listed on the Korea Stock Exchange from 2000 to 2003. Our study shows that the presence of foreign shareholders and foreign directors increases audit quality. Furthermore, the presence of foreign monitors improves the audit quality of firms controlled by professional management more than that of owner-controlled firms.