Audit committee ownership and the cost of equity capital

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahsan Habib ◽  
Md. Borhan Uddin Bhuiyan ◽  
Julia Y.H. Wu
Keyword(s):  
Firm Performance ◽  
Financial Reporting ◽  
Audit Committee ◽  
Reporting Quality ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Data Set ◽  
Content Type ◽  
The Cost

Purpose This paper aims to investigate whether audit committee ownership (consisting of both equity holdings and option holdings) is associated with the cost of equity capital. Design/methodology/approach This paper uses regression analysis to examine the association between audit committee ownership and the cost of equity capital. The data set consists of 2,825 firm-year observations for companies listed on the ASX between 2001 and 2015. This paper also conducts tests to explore the mediating effects of financial reporting quality, firm performance and the risk of reporting problems, on the relation between audit committee ownership and cost of equity capital. Findings The analyses reveal that audit committee ownership reduces the firm’s cost of equity and, thereby, support the incentive alignment view. However, the association is driven primarily by audit committee equity ownership, with option holdings having an insignificant effect. This paper also finds that firm performance mediates the association between audit committee ownership and the cost of equity capital. Practical implications Findings of the existing corporate governance research relating to the cost of equity capital and audit committee ownership remain sparse in the context of “comply-or-explain” types of regulatory environment, like that of Australia. The findings indicate that principle-based discretionary governance arrangements, e.g. compensating audit committee members with company equity, may bring benefits to firms in terms of cheaper financing. Regulators, scholars and practitioners are invited to consider further the comprehensive implications of the structure and transparency of audit committee incentives on the effective functioning of security markets. Originality/value The effects of audit committee ownership on the cost of equity capital are an issue of direct economic consequence for equity investors. The main finding of this study, namely, that a firm with higher audit committee share ownership is likely to benefit from a lower cost of equity capital, therefore adds value to the limited extant literature.

The impact of mandatory IFRS adoption on capital markets: evidence from Korea

2018 ◽  
Vol 26 (1) ◽  
pp. 38-58 ◽  
Author(s):  
Saerona Kim ◽  
Haeyoung Ryu
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Joint Effect ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Ifrs Adoption ◽  
The Cost ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of adoption of the mandatory International Financial Reporting Standards (IFRS) on the cost of equity capital in a unique Korean setting. In Korea, individual financial statements were taken as primary financial statements. Before the adoption of IFRS, consolidated financial statements were taken as supplementary financial statements. Design/methodology/approach The authors measure the cost of equity using the average estimates from the implied cost of capital models proposed by Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004) and Ohlson and Juettner-Nauroth (2005), using it as the primary dependent variable. Mandatory IFRS adoption, the independent variable in this study, is assigned a value of 1 for the post-adoption period and 0 otherwise. Findings Using a sample of listed Korean companies during the period from 2000 to 2013, the authors find evidence of a significant reduction in the cost of equity capital in Korean listed companies after mandatory adoption of the IFRS in 2011, after controlling for a set of market variables. Originality/value This study is one of a growing body of literature on the relations between mandatory IFRS adoption and the cost of equity capital (Easley and O’Hara 2004; Covrig et al. 2007; Lambert et al. 2007; Daske et al. 2008). According to the results of this study, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have had a joint effect on the cost of equity capital, leading to a large decrease in expected equity returns.

The signalling role of audit committee characteristics and the cost of equity capital

2018 ◽  
Vol 30 (3) ◽  
pp. 387-406 ◽  
Author(s):  
Ranjith Appuhami
Keyword(s):  
Audit Committee ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Listed Firms ◽  
Monitoring Process ◽  
Signalling Theory ◽  
The Cost

Purpose The purpose of this study is to examine whether audit committee characteristics influence the cost of equity capital. Design/methodology/approach Drawing on signalling theory, this study hypothesises that the presence of an AC with adequate characteristics serves as a market “signal” of the credibility of the effective monitoring process and hence affects the perception of capital providers on the cost of equity capital. The study uses a multiple regression analysis on data collected from a sample of top Australian listed firms. Findings The study finds that audit committee characteristics such as size, meeting frequency and independence are significantly and negatively associated with the cost of equity capital. However, there is no significant evidence that the financial qualifications of audit committee directors are associated with the cost of equity capital. Originality/value While there have been several studies examining the cost of equity capital, there is very limited research on the cost of capital in Australian firms. The study aims to fill this gap, in part, and contribute to the literature on corporate governance and signalling theory.

How Does XBRL Affect the Cost of Equity Capital? Evidence from an Emerging Market

2015 ◽  
Vol 14 (2) ◽  
pp. 123-145 ◽  
Author(s):  
Songsheng Chen ◽  
Ling Harris ◽  
Wenying Li ◽  
Donglin Wu
Keyword(s):  
Financial Reporting ◽  
Emerging Market ◽  
Reporting Quality ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Post Test ◽  
Direct Linkage ◽  
High Level ◽  
The Cost

ABSTRACT Applying path analysis, we examine how eXtensible Business Reporting Language (XBRL) in China affects the cost of equity capital. Using a one-group pre- and post-test design, we find that XBRL reduces the cost of equity capital and that XBRL strengthens the direct linkage of the inverse relationship between financial reporting quality and the cost of equity capital but not the indirect linkage via the mediation of information asymmetry. Our findings also show that XBRL adoption leads to a greater reduction in the cost of equity capital, when there is a high level of corporate governance. Our study contributes to research on XBRL and to practice by documenting how XBRL affects the cost of equity capital.

Disclaimer language in US banks’ audit committee reports: determinants and consequences

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Christine Naaman ◽  
Karen Naaman ◽  
Najib Sahyoun
Keyword(s):  
Financial Reporting ◽  
Voluntary Disclosure ◽  
Audit Committee ◽  
Reporting Quality ◽  
Multivariate Regression Analysis ◽  
Cost Of Equity ◽  
Content Type ◽  
Holding Companies ◽  
High Level ◽  
The Cost

Purpose This paper aims to investigate the determinants and consequences of using disclaimer language in the banks’ audit committee (AC) reports. This study aims to analyze the factors tempting AC members of banks to disclose disclaimer language in the AC reports and the effect of such language on the cost of equity. Design/methodology/approach The data cover the period from 2006 to 2015 and considers the top US bank holding companies. Voluntary disclosure in the AC report is manually coded by using a scoring grid. Multivariate regression analysis is mainly used in the study. Findings The findings suggest that the ACs are using the disclaimer language to protect themselves when disclosing a high level of voluntary information that describes their oversight activities or to reduce their liability exposure due to lower financial reporting quality. The findings also reveal that investors are requiring a higher return on their investments whenever ACs use disclaimer language in their reports. Originality/value The AC report provides useful information to shareholders who evaluate the AC’s performance and accordingly vote for or against AC members on annual basis. The paper sheds lights on the motives and consequences of disclaimer language in the ACs report. Thus, the study benefits shareholders by providing empirical evidence in regard to the usage of disclaimer language. Also, the findings benefit industry, corporate governance organizations, standard setters and regulators that analyze AC disclosures and issue recommendations or new standards for improving those disclosures.

Does IFRS adoption decrease the cost of equity of the global tourism firms?

2017 ◽  
Vol 23 (8) ◽  
pp. 1615-1631
Author(s):  
Zhi-Yuan Feng ◽  
Ying-Chieh Wang ◽  
Hua-Wei Huang
Keyword(s):  
Financial Reporting ◽  
Equity Capital ◽  
Tourism Industry ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Legal Enforcement ◽  
Global Tourism ◽  
The Cost

This article answers the question of whether the adoption of International Financial Reporting Standards (IFRS) reduces the cost of equity capital, with a focus on the tourism industry. We employ a set of global tourism companies and find that mandatory IFRS adoption has a significantly negative relation with the cost of equity capital. However, we find that this relation is varied with different business cultures and geographic areas. Moreover, from interactive analyses of country institutions for the relation between mandatory IFRS adoption and tourism firm’s cost of equity, we show that adopting IFRS complements the deficiencies of various country institutions, such as investor protection, the strength of legal enforcement, and corporate governance.

scholarly journals Earnings quality and the cost of equity capital: evidence on the impact of legal background

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmed Hassan Ahmed ◽  
Yasean Tahat ◽  
Yasser Eliwa ◽  
Bruce Burton
Keyword(s):  
Earnings Quality ◽  
Institutional Ownership ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
The Usa ◽  
The Uk ◽  
The Cost ◽  
The Impact

Purpose Earnings quality is of great concern to corporate stakeholders, including capital providers in international markets with widely varying regulatory pedigrees and ownership patterns. This paper aims to examine the association between the cost of equity capital and earnings quality, contextualised via tests that incorporate the potential for moderating effects around institutional settings. The analysis focuses on and compares evidence relating to (common law) UK/US firms and (civil law) German firms over the period 2005–2018 and seeks to identify whether, given institutional dissimilarities, significant differences exist between the two settings. Design/methodology/approach First, the authors undertake a review of the extant literature on the link between earnings quality and the cost of capital. Second, using a sample of 948 listed companies from the USA, the UK and Germany over the period 2005 to 2018, the authors estimate four implied cost of equity capital proxies. The relationship between companies’ cost of equity capital and their earnings quality is then investigated. Findings Consistent with theoretical reasoning and prior empirical analyses, the authors find a statistically negative association between earnings quality, evidenced by information relating to accruals and the cost of equity capital. However, when they extend the analysis by investigating the combined effect of institutional ownership and earnings quality on financing cost, the impact – while negative overall – is found to vary across legal backdrops. Research limitations/implications This paper uses institutional ownership as a mediating variable in the association between earnings quality and the cost of equity capital, but this is not intended to suggest that other measures may be of relevance here and additional research might usefully expand the analysis to incorporate other forms of ownership including state and foreign bases. Second, and suggestive of another avenue for developing the work presented in the study, the authors have used accrual measures of earnings quality. Practical implications The results are shown to provide potentially important insights for policymakers, creditors and investors about the consequences of earnings quality variability. The results should be of interest to firms seeking to reduce their financing costs and retain financial viability in the wake of the impact of the Covid-19 pandemic. Originality/value The reported findings extends the single-country results of Eliwa et al. (2016) for the UK firms and Francis et al. (2005) for the USA, whereby both reported that the cost of equity capital is negatively associated with earnings quality attributes. Second, in a further increment to the extant literature (particularly Francis et al., 2005 and Eliwa et al., 2016), the authors find the effect of institutional ownership to be influential, with a significantly positive impact on the association between earnings quality and the cost of equity capital, suggesting in turn that institutional ownership can improve firms’ ability to secure cheaper funding by virtue of robust monitoring. While this result holds for the whole sample (the USA, the UK and Germany), country-level analysis shows that the result holds only for the common law countries (the UK and the USA) and not for Germany, consistent with the notion that extant legal systems are a determining factor in this context. This novel finding points to a role for institutional investors in watching and improving the quality of financial reports that are valued by the market in its price formation activity.

The impact of audit quality on earnings management and cost of equity capital: evidence from a developing market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ben Le ◽  
Paula Hearn Moore
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Big 4 ◽  
The Government ◽  
The Impact

Purpose This study aims to examine the effects of audit quality on earnings management and cost of equity capital (COE) considering the impact of two owner types: government ownership and foreign ownership. Design/methodology/approach The study uses a panel data set of 236 Vietnamese firms covering the period 2007 to 2017. Because the two main dependent variables of the COE capital and the absolute value of discretionary accruals receive fractional values between zero and one, the paper uses the generalised linear model (GLM) with a logit link and the binomial family in regression analyses. 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. Big 4 companies include KPMG, Deloitte, EY and PwC, whereas the non-big 4 are the other audit companies. Findings The study finds a negative relationship between audit quality and both the COE capital and income-increasing discretionary accruals. The effects of audit quality on discretionary accruals and the COE capital depend on the ownership levels of two important shareholders: the government and foreign investors. Foreign ownership is negatively associated with discretionary accruals; however, the effect is more pronounced in the sub-sample of state-owned enterprises (SOEs), the firms where the government owns 50% or more equity, than in the sub-sample of Non-SOEs. Originality/value To the best of the knowledge, no prior similar study exists that used the GLM with a logit link and the binomial family regression. Global investors may be interested in understanding how unique institutional settings and capital markets of each country impact the financial reporting quality and cost of capital. Further, policymakers of developing markets may have incentives to improve the quality of financial reporting and reduce the cost of capital which should result in attracting more foreign investments.

Does intellectual capital disclosure affect the cost of equity capital? An empirical analysis in the integrated reporting context

2020 ◽  
Vol 21 (6) ◽  
pp. 985-1007 ◽  
Author(s):  
Antonio Salvi ◽  
Filippo Vitolla ◽  
Nicola Raimo ◽  
Michele Rubino ◽  
Felice Petruzzella
Keyword(s):  
Intellectual Capital ◽  
Equity Capital ◽  
Corporate Disclosure ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Integrated Reporting ◽  
Empirical Examination ◽  
Content Type ◽  
The Cost ◽  
The Impact

PurposeThe purpose of this study is to examine the impact of intellectual capital disclosure on the cost of equity capital in the context of integrated reporting, which represents the ultimate frontier in the field of corporate disclosure.Design/methodology/approachThe authors employ content analysis to measure intellectual capital disclosure levels along with a panel analysis on a sample of 164 integrated reports.FindingsEmpirical outcomes indicate that intellectual capital disclosure levels have a significantly negative association with the cost of equity capital.Originality/valueThis study's major contribution lies in its originality in terms of empirical examination of the relationship between intellectual capital disclosure in integrated reports and the cost of equity capital.

The impact on the cost of equity capital in the effects of integrated reporting quality

2019 ◽  
Vol 29 (2) ◽  
pp. 519-529 ◽  
Author(s):  
Filippo Vitolla ◽  
Antonio Salvi ◽  
Nicola Raimo ◽  
Felice Petruzzella ◽  
Michele Rubino
Keyword(s):  
Reporting Quality ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Integrated Reporting ◽  
The Cost ◽  
The Impact
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