Association between Big 4 Auditor Choice and Cost of Equity Capital for Multiple-Segment Firms

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.

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Can Big 4 versus Non-Big 4 Differences in Audit-Quality Proxies Be Attributed to Client Characteristics?

The Accounting Review ◽

10.2308/accr.00000009 ◽

2011 ◽

Vol 86 (1) ◽

pp. 259-286 ◽

Cited By ~ 450

Author(s):

Alastair Lawrence ◽

Miguel Minutti-Meza ◽

Ping Zhang

Keyword(s):

Audit Quality ◽

Forecast Accuracy ◽

Equity Capital ◽

Analyst Forecast ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Client Characteristics ◽

Big 4 ◽

Audit Firms ◽

Matching Models

ABSTRACT: This study examines whether differences in proxies for audit quality between Big 4 and non-Big 4 audit firms could be a reflection of their respective clients’ characteristics. In our analyses, we use three audit-quality proxies—discretionary accruals, the ex ante cost-of-equity capital, and analyst forecast accuracy—and employ propensity-score and attribute-based matching models in attempt to control for differences in client characteristics between the two auditor groups while estimating the audit-quality effects. Using these matching models, we find that the effects of Big 4 auditors are insignificantly different from those of non-Big 4 auditors with respect to the three audit-quality proxies. Our results suggest that differences in these proxies between Big 4 and non-Big 4 auditors largely reflect client characteristics and, more specifically, client size. We caution the reader that this study has not resolved the question, although we hope that it encourages other researchers to explore alternative methodologies that separate client characteristics from audit-quality effects.

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Litigation Risk and the Financial Reporting Credibility of Big 4 versus Non-Big 4 Audits: Evidence from Anglo-American Countries

The Accounting Review ◽

10.2308/accr.2004.79.2.473 ◽

2004 ◽

Vol 79 (2) ◽

pp. 473-495 ◽

Cited By ~ 391

Author(s):

Inder K. Khurana ◽

K. K. Raman

Keyword(s):

Financial Reporting ◽

Audit Quality ◽

Equity Capital ◽

Brand Name ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Big 4 ◽

Ex Ante ◽

Anglo American ◽

The U.S

Prior research suggests that Big 4 auditors provide higher quality audits in the U.S. in order to protect the firm's brand name reputation and to avoid costly litigation. In this study, we examine whether the perceived higher quality of a Big 4 audit is related to auditor litigation exposure or to reputation concerns. Specifically, we utilize an estimable proxy for financial reporting credibility—the ex ante cost of equity capital—to examine whether Big 4 auditors are perceived as providing higher quality audits (relative to non-Big 4 auditors) in the U.S., and in the less litigious (but economically similar) environments in other Anglo-American countries during the 1990–99 period. We find that a Big 4 audit is associated with a lower ex ante cost of equity capital for auditees in the U.S. but not in Australia, Canada, or the U.K. Our findings suggest that it is litigation exposure rather than brand name reputation protection that drives perceived audit quality.

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Audit Partner Tenure and Cost of Equity Capital

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50308 ◽

2012 ◽

Vol 32 (1) ◽

pp. 183-202 ◽

Cited By ~ 22

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.

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