The Effects of High Audit Quality by Auditor Type on the Cost of Equity Capital : Focusing on the Mediating Effect of Disclose Quality

Credible audit quality is a precondition for a firm’s sustainability. External auditors offer assurance with regard to the uncertain factors that can jeopardize a firm’s sustainability and provide audit opinions that help investors assess risk. After the global crisis and accounting scandals, mandatory audit firm rotation has been implemented globally. However, few studies have investigated either the cost or the benefit of mandatory audit firm rotation. Prior studies provide only indirect evidence on the effects of audit firm tenure on audit quality/perceived audit quality. By discussing prior arguments, we examine how investors perceive the implementation of mandatory audit firm rotation in Korea. Using a unique and direct setting to examine our research question, we analyze the relationship between firms with mandatorily switched audit firms and the cost of equity capital from 2006 to 2008. We find that the mandatory change in the auditors has a negative association with the cost of equity capital. The results are robust to using the arithmetic mean of the cost of equity capital, lagged control variables, and the manufacturing industry effect. The results indicate that investors perceive that mandatory audit firm rotation provides an environment for qualified audits by enhancing auditor independence and skepticism, and thus decreases the cost of equity capital. This study helps to improve our understanding of the impact of mandatory audit firm rotation the information risk evaluations and provides political implications for policy makers by showing the benefit of mandatory audit firm rotation.

Download Full-text

ANALISIS PENGARUH KUALITAS AUDIT TERHADAP MANAJEMEN LABA DAN COST OF EQUITY CAPITAL: STUDI PENDEKATAN COMPOSITE MEASURE

Media Riset Akuntansi Auditing & Informasi ◽

10.25105/mraai.v13i2.1744 ◽

2017 ◽

Vol 13 (2) ◽

pp. 95

Author(s):

Shelni Yuvita ◽

Deni Darmawati

Keyword(s):

Regression Analysis ◽

Earnings Management ◽

Audit Quality ◽

Manufacturing Firms ◽

Equity Capital ◽

The Other ◽

Composite Measure ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

The Cost

The purpose of this study is to observe the effect of audit quality on earnings management and cost of equity capital. Audit quality is measured by the composite measure (variable AQMS), earnings management is measured by the modified Jones model, the cost of equity capital is measured with a modified Ohlson models with random walk. This study uses manufacturing firms for samples during 2010-2012 by using purposive sampling and regression analysis for analyst the data. The results showed that audit quality has a significant effect on earnings management and cost of equity capital, while for the control variables size and leverage, only leverage which has significant effect to cost of equity capital, and the other has no significant effect on earnings management and cost of equity capital. Keywords: Audit Quality, earnings management, cost of equity capital, composite measure

Download Full-text