Investigating the Effect of Investors' Sentiment and Institutional Investors' Inattention on Audit Risk Considering the Moderating Role of Audit Quality

Subject Areas : Financial and Behavioral Researches in Accounting

Mahdi Filsaraei ¹ , Fatemeh Safaei Mohammadi ²

1 - . Assistant Professor, Department of Accounting, Hakim Toos Higher Education institute, Mashhad, Iran
2 - Department of Accounting, Hakim Toos Higher Education institute, Mashhad, Iran

Received: 2025-06-21 Accepted : 2025-08-29 Published : 2025-09-07

Keywords: Investor Sentiment, Institutional Investor Inattention, Audit Risk, Audit Quality,

Abstract :

This study seeks to investigate the effect of investors' sentiments and institutional investors' negligence on audit risk considering the moderating role of audit quality in companies listed on the Tehran Stock Exchange. For this purpose, a sample of 137 companies listed on the Tehran Stock Exchange was selected using the systematic elimination method from 2015 to 2023 to test the research hypotheses. Multiple regression and Eviews10 software were used to analyze the data and test the hypotheses. The findings indicate that there is a positive and significant relationship between investors' sentiments and audit risk. There is also a positive and significant relationship between institutional investors' Inattention and audit risk. On the other hand, audit quality moderates the relationship between investor sentiment and institutional investor Inattention and audit risk. There is an undeniable need to examine the interaction between investor behavioral variables and audit performance, especially in the context of emerging markets such as Iran. Such research can help regulatory agencies, auditors, financial managers, and policymakers to have a more accurate understanding of the behavioral roots of audit risk fluctuations and provide appropriate solutions to improve the quality of financial reporting and enhance investor confidence.

References:

Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit committee characteristics and restatements. Auditing: A journal of practice & theory, 23(1), 69-87.
Appel, I. R., Gormley, T. A., & Keim, D. B. (2016). Passive investors, not passive owners. Journal of Financial Economics, 121(1), 111-141.
Baker, M., & Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of financial Markets, 7(3), 271-299.
Brav, A., Jiang, W., Ma, S., & Tian, X. (2018). How does hedge fund activism reshape corporate innovation?, Journal of Financial Economics, 130(2), 237-264.
Cao, J., He, G., & Jiao, Y. (2025). Too sensitive to fail: The impact of sentiment connectedness on stock price crash risk. Entropy, 27(4), 345.
Cassell, C. A., Drake, M. S., & Dyer, T. A. (2018). Auditor litigation risk and the number of institutional investors. Auditing: A Journal of Practice & Theory, 37(3), 71-90.
Chen, T., Dong, H., & Lin, C. (2017). Institutional ownership and audit quality: evidence from Russell index reconstitutions. Available at SSRN 2849685.
Cohen, J., Krishnamoorthy, G., & Wright, A. (2010). Corporate governance in the post‐Sarbanes‐Oxley era: Auditors’ experiences. Contemporary Accounting Research, 27(3), 751-786.
Colbert, J. L. (1996). International and US standards‐audit risk and materiality. Managerial Auditing Journal, 11(8), 31-35.
Davis, A. K., Ge, W., Matsumoto, D., & Zhang, J. L. (2022). The effect of manager-specific optimism on the tone of earnings conference calls. Review of Accounting Studies, 20(2), 639–673
El Ghoul, S., Guedhami, O., Mansi, S. A., & Yoon, H. J. (2023). Institutional investor attention, agency conflicts, and the cost of debt. Management Science, 69(9), 5596-5617.
Garel, A., Martin-Flores, J. M., Petit-Romec, A., & Scott, A. (2021). Institutional investor distraction and earnings management. Journal of Corporate Finance, 66, 101801.
Hassani, M. and Yunes Hama, B. (2022). Analysis the relationship between Audit Fees & Audit Risk considering Restatement and Financial Distress. Professional Auditing Research, 2(6), 82-111. (in Persian).
Heydarpour. F., Tariverdi. Y. & Mehrabi. M. (2013). The effect of investors' emotional tendencies on stock returns, Financial Knowledge of Securities Analysis, 6(17): 1-13. (in Persian).
Kazemdokht, F. and Baradaran Hassanzadeh, F. (2023). The relationship Fee Pressure and Audit Quality. Professional Auditing Research, 3(10), 116-139. (in Persian).
Kempf, E., Manconi, A., & Spalt, O. (2017). Distracted shareholders and corporate actions. The Review of Financial Studies, 30(5), 1660-1695.
Kordestani, G. , Rezazadeh, J. , Kazemi Olum, M. and Abdi, M. (2018). The Investigation of Audit Market Concentration Impact on Audit Fees and Audit Quality. Financial Accounting Research, 10(2). (in Persian).
Lee, G., & Fargher, N. L. (2018). The role of the audit committee in their oversight of whistle-blowing. Auditing: A Journal of Practice & Theory, 37(1), 167-189.
Li, H., Yang, M., Chan, K. C., & Gao, S. (2022). Do institutional investors’ corporate site visits impact seasoned equity offering discounts? Evidence from detailed investor bids in SEO auctions. Research in International Business and Finance, 62, 101746.
Liu, C., Low, A., Masulis, R. W., & Zhang, L. (2020). Monitoring the monitor: Distracted institutional investors and board governance. The Review of Financial Studies, 33(10), 4489-4531.
Low, K.Y. (2021). The effects of industry specialization on audit risk assessments and audit-planning decisions, The Accounting Review, 79(1), 201-219.
Mock, T. J., Wright, A., & Srivastava, R. P. (1998). Audit program planning using a belief function framework. In Proceedings of the 1998 Deloitte & Touche University of Kansas Symposium on Auditing Problems (pp. 115-142).
Morshidzadeh, M. & Changiz, Sh. (2013). The relationship between institutional investors' inattention and audit quality of companies listed on the Tehran Stock Exchange, 7th International Conference on Knowledge and Technology of the Third Millennium of Economics, Management and Accounting of Iran, Tehran. (in Persian).
Nonahal nahr, A. A. & Akbarpour, S. (2019). Investigating the Effect of Auditor's Experience on Audit Fees and Audit Quality in Companies Listed in Tehran Stock Exchange. Journal of Accounting and Management Vision, 2(6), 1-16. (in Persian).
Peng, L., & Xiong, W. (2006). Investor attention, overconfidence and category learning. Journal of Financial Economics, 80(3), 563-602.
Rong, Z., Wu, X., & Boeing, P. (2017). The effect of institutional ownership on firm innovation: Evidence from Chinese listed firms. Research Policy, 46(9), 1533-1551.
Setayesh, M. H. , Aljuafari, M. S. and Namazi, N. R. (2025). The role of emerging technologies on the quality of internal audit in Iraqi public universities. Professional Auditing Research, in print. (in Persian).
Sutton, C. V. (2025). Navigating Financial Turbulence with Confidence: Preparing for Future Market Challenges, Crashes & Crises. NuovoNova Ltd..
Taylor, M. H. (2000). The effects of industry specialization on auditors' inherent risk assessments and confidence judgments. Contemporary accounting research, 17(4), 693-712.
vaez, S. A. , GHANNAD, A. , Ghalambor, M. H. and Anvari, E. (2024). Institutional investor inattention and audit quality. Accounting and Auditing Research, In print. (in Persian).
Wang, T., & Cheng, D. (2023). Executive shareholding, institutional investor shareholding and enterprise innovation. European Journal of Innovation Management, 26(6), 1744-1762.
Wu, J., Habib, A., Weil, S., & Wild, S. (2018). Exploring the identity of audit committee members of New Zealand listed companies. International Journal of Auditing, 22(2), 164-184.
Yang, J., Wu, H., & Yu, Y. (2021). Distracted institutional investors and audit risk. Accounting & Finance, 61(3), 3855-3881.
Zhang, D., Pan, X., & Ma, S. (2023). The effects of institutional investors and their contestability on firm innovation: evidence from Chinese listed firms. Research Policy, 52(10), 104872.