Auditor-Provided Tax Nonaudit Services and the Implied Cost of Equity Capital

2017 ◽  
Vol 37 (3) ◽  
pp. 1-24 ◽  
Author(s):  
Nasser Alsadoun ◽  
Vic Naiker ◽  
Farshid Navissi ◽  
Divesh S. Sharma
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Sarbanes Oxley ◽  
Sensitivity Tests ◽  
Nonaudit Services ◽  
Implied Cost Of Equity

SUMMARY Although the Sarbanes-Oxley Act of 2002 (SOX) banned most nonaudit services (NAS), it did not restrict auditors from providing tax NAS to their audit clients. In the post-SOX period, regulators and investors are highly concerned about the increase in tax NAS and consequently calling for restrictions. The profession contends that tax NAS are beneficial to the audit and opposes limitations. We contribute to this ongoing debate and fill a void in the literature by examining investors' perception of auditor-provided tax NAS, as reflected in the implied cost of equity capital. Our results suggest that investors require higher cost of equity capital for clients that generate more tax NAS revenue for their auditor's office. Further tests reveal that our main finding is driven by audit clients that report more uncertain tax reserves (higher tax risk), rather than clients that exhibit poor financial reporting quality. The effects we document are economically significant and robust to a large battery of sensitivity tests. Our findings suggest that investors seem to negatively perceive tax NAS because of punitive and cash flow risks associated with tax NAS. Data Availability: All data are publicly available from sources identified in the text.

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.

Audit Partner Tenure and Cost of Equity Capital

2012 ◽  
Vol 32 (1) ◽  
pp. 183-202 ◽  
Author(s):  
Masoud Azizkhani ◽  
Gary S. Monroe ◽  
Greg Shailer
Keyword(s):  
Equity Capital ◽  
Data Availability ◽  
Future Research ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Omitted Variables ◽  
Big 4 ◽  
Sensitivity Tests ◽  
Ex Ante ◽  
Nonlinear Relation

SUMMARY We examine whether audit engagement partner tenure and rotation affect investors' perceptions, as proxied by the ex ante cost of equity capital. We find that partner tenure has a nonlinear relation with the ex ante cost of equity capital for non-Big 4 audit engagements prior to the introduction of partner rotation requirements, and that the imputed gains from partner tenure appear similar to the imputed gains of having a Big 4 auditor. Consistent with the tenure results, we also find that partner rotation is associated with increased ex ante cost of equity capital. Our results are very robust to a variety of sensitivity tests and raise important questions for future research. It is not known to what extent investors or analysts are aware of the audit partner's identity or pay attention to audit partner tenure; if investors or analysts do not consider partner tenure, future research may identify omitted variables that have the same nonlinear relationship with the ex ante cost of capital that we observe for non-Big 4 audit partner tenure. JEL Classifications: M42; M48. Data Availability: The data used are from public sources identified in the manuscript.

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.

Options Trading and the Cost of Equity Capital

2012 ◽  
Vol 88 (1) ◽  
pp. 261-295 ◽  
Author(s):  
Vic Naiker ◽  
Farshid Navissi ◽  
Cameron Truong
Keyword(s):  
Trading Volume ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Expected Return ◽  
Cross Sectional ◽  
Wide Range ◽  
Options Trading ◽  
Implied Cost Of Equity

ABSTRACT: This study examines how options trading affects the rate of return expected by investors, i.e., the implied cost of equity capital. Our cross-sectional analysis suggests that firms with listed options have lower implied cost of equity capital than firms without listed options, while the results from our temporal difference-in-differences analysis suggest that firms with listed options experience a significant decrease in their implied cost of equity capital relative to a matched sample of firms without listed options following an options listing. Moreover, we find that within firms that have listed options, firms with higher options trading volume are associated with lower implied cost of equity capital. These findings, which are robust to a wide range of additional tests, are consistent with the view that options trading improves the precision of information and reduces information asymmetry problems, resulting in lower expected return on equity. Data Availability: All data used in this study are publicly available from the sources identified in the paper.

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.

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