Quasi-indexer Ownership and Auditor Independence : Evidence from Non-audit Service Fees

We find that quasi-indexer ownership is negatively associated with the ratio of non-audit service fees to total fees paid to the audit firm performing the audit service and with the likelihood of paying the audit firm more non-audit service fees than audit service fees. Using the annual Russell 1000/2000 index reconstitution as plausibly exogenous variation in quasi-indexer ownership, we show that the dampening effect of quasi-indexer ownership on companies' purchase of non-audit services from auditors seems to be causal. We interpret our finding as evidence consistent with quasi-indexers' preference for auditor independence and belief about the impairment effect of nonaudit services on auditor independence and with companies catering to their preference. Moreover, we show that the dampening effect of quasi-indexer ownership varies across subsamples in ways consistent with our interpretation