Institutional investors, stewardship code disclosures and audit fees

Purpose - This study uses content analysis of disclosures under the Japanese Stewardship Code to examine how investee company audit fees are influenced by institutional investor governance. Design/methodology/approach - Scores are developed based on objective and verifiable Code disclosures made by the top-five institutional investors of Nikkei 225 index companies. The scores are related to management of conflicts of interest, monitoring actions and resource availability connected with stewardship. Findings - The results show that higher scores on monitoring and resource availability are associated with lower audit fees. The extent of resources that institutional investors allocate to playing an effective stewardship role is found to be the primary determinant of their influence on audit fees. Overall, the findings are consistent with governance by institutional investors reducing audit risk and audit effort, which leads to lower audit fees. Originality/value - The study offers new insights because there is no apparent prior research that uses Code disclosure content to measure institutional investor governance. This provides new information on the open question of the relation between audit fees and institutional investor governance.