Audit Quality, Earnings Management and Cost of Equity Capital: Evidence from a Developing Market

• In Event: Audit Quality: International Evidence

Abstract

Abstract

This paper examines the effect of audit quality on earnings management and the cost of equity capital. We use a panel dataset of Vietnam firms for the period 2007 to 2017. Unlike prior studies, we use the generalized linear model (GLM) with a logit link and the binomial family regression because the main dependent variables (the cost of equity capital and the absolute value of discretionary accruals) receive fractional values between zero and one. The paper uses numerous measures of audit quality including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or to the industry-leading Big 4 auditor and the length of Big 4 auditor tenure. We find a significantly negative relationship between audit quality and both the cost of equity capital and income-increasing discretionary accruals. The effects of audit quality on the cost of equity capital are more pronounced for non-state-owned-enterprises (Non-SOEs) which have less external capital access than for SOEs; however, the effects of audit quality on discretionary accruals are more robust for SOEs than for Non-SOEs. The findings confirm that under the same legal jurisdiction, the effects of audit quality on the cost of equity capital and discretionary accruals are different among various groups of firms with different ownership structures and access to external capital. Finally, industry expertise and the size of audit firm are important drivers of audit quality.

Keywords: Audit quality, cost of equity capital, discretionary accruals, state-owned-enterprises, access to capital, Vietnam
JEL Classification: M40, M41, M42

Authors

• Ben Le, University of Tennessee Martin

• Paula Moore, University of Tennessee at Martin