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This paper examines the effect of audit quality on earnings management and the cost of equity capital, considering the impact of two owner types: government ownerships and foreign ownerships. We use a panel dataset of Vietnamese 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 audit quality measures, including hiring Big 4 auditors or the industry-leading Big 4 auditor, changing from non-Big 4 auditors to Big 4 auditors or 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 discretionary accruals and the cost of equity capital depend on the ownership levels of two important shareholders: the government and foreign investors.
Keywords: Audit quality, cost of equity capital, earnings management, government ownership, foreign ownership, Vietnam
JEL Classification: M40, M41, M42