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Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

The rise of index funds, or passive investing, in recent decades has caused heated debates over the efficacy of passive investors' stewardship role in corporate governance. Our study adds to this emerging line of literature by examining whether passive investors enhance the quality of financial statement audits, a key aspect of corporate governance mechanisms. We exploit the yearly Russell index reassignment, which provides us with an ideal setting to study the causal relation between passive institutional investors (i.e., index trackers) and firms' audit quality. Examining firms closely surrounding the Russell 1000/2000 cutoff line, we find that higher passive ownership leads to higher audit quality proxied by audit fees. To investigate the channel through which passive investors influence audit-related governance issues, our evidence from auditor ratification voting records suggests that passive investors do 'voice' their opinion on low-quality audits. Such effort also leads to a higher likelihood of auditor turnover in the following year. In the cross-sectional analysis, we also find that the positive effect of passive investors on audit quality is more pronounced in firms with higher agency costs. Thus, our study supports the view that passive investors play an active role in improving corporate governance. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)