Audit Quality, Earnings Management, and Cost of Equity Capital: Evidence from India

Abstract

This study examines the effect of audit quality on earnings management and cost of equity capital of listed companies in India. Our results show that companies employing a high-quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand-alone companies but that they benefit less from employing a high-quality auditor. Our results are based on a large sample of 7,303 firm-year observations on listed companies in India and are robust to alternative measures for our main variablesaudit quality, earnings management, and cost of capitaland to tests for endogeneity and the impact of the global financial crisis (GFC). Given the distinctive and unique institutional features of the Indian market such as the dominant role of family business groups in the national economy, large market share of domestic audit firms, less litigious environment, and less effective professional accounting bodies in checking audit failure, our findings make a significant contribution to the literature on the role of audit quality as a corporate governance monitoring mechanism as reflected in the impact on earnings management and cost of equity capital.

The Impact of Financial Statement Comparability on Earnings Management: Evidence from Frontier Markets

“…The findings within this study evince a notably different pattern of EM control exhibited by BigN than that found by Francis and Wang (2008); Houqe et al (2017). Examination shows BigN to constrain EM in regression estimations, save for fixed effects estimation in both the initial examination and when the lagged comparability score was tested.…”

“…Through the verification of financial statement reliability and fairness, audits enhance financial information quality and mitigates EM (Khanh and Nguyen 2018). Prior research has also shown an association between audit quality and EM (Becker et al 1998;Ebraheem Saleem 2019;Ghosh and Moon 2005;Ghosh 2007;Gul et al 2009) and that firms that employ a high-quality auditor, experience lower levels of EM (Francis and Wang 2008;Houqe et al 2017). Further, studies show that the manipulation of financial results (such as accruals) reduces when the auditor is independent, or the audit company is large (see Becker et al (1998); Krishnan (2003); Rusmin (2010); Sohn (2016)).…”

The Effect of Annual Independent Audit Reports on Stock Market Performance: Evidence from Turkey and Germany

“…Regression method was used in the analyses and he emphasizes that ISE cannot be classified as efficient market even a semi-strong form. Houqe et al (2017) analyzed a 7,303 firm-year observations sample to expose the effect of audit quality on earnings management and cost of equity. According to their results, the companies employing a high-quality auditor have a lower degree of earnings management and lower cost of equity in India.…”

Pengaruh Beta Saham, Likuiditas Saham, Atribut Audit, dan Tata Kelola Perusahaan Terhadap Biaya Modal Ekuitas

“…Berdasarkan hasil penelitian ini, variabel ROA menunjukkann koefisien sebesar -0,038 dan nilai signifikansi sebesar 0,035 dimana lebih kecil dari 0,05 sehingga profitabilitas berpengaruh negatif terhadap biaya modal ekuitas. Hasil penelitian ini konsisten dengan hasil Yanesari et al (2012), Purwaningtias dan Surifah (2015), Houqe et al (2015) menunjukkan bahwa ROA berpengaruh negatif terhadap biaya modal ekuitas yang artinya ROA yang tinggi akan menurunkan biaya modal ekuitas suatu perusahaan.…”