Earnings management, audit quality, and cost of debt: evidence from a Central Asian economy

Abstract

Purpose This study aims to examine the effects of earnings management and audit quality on cost of debt of listed companies in Kazakhstan. The study also investigates the effects of audit quality on earnings management and whether the relationship between earnings management and cost of debt is affected by audit quality in the context of a given emerging economy. Design/methodology/approach The study sample consists of public companies listed in the Kazakhstan Stock Exchange (KASE) from 2011 to 2016, and all data were obtained from audited financial statements and annual reports downloaded from the webpage of KASE. The study uses the cross-sectional ordinary least squares technique to test the impact of audit quality and earnings management on cost of debt. Findings The collected empirical evidence shows that earnings management is negatively related to cost of debt. The findings also indicate that higher audit quality leads to a lower cost of debt. However, the results suggest that audit quality has no impact on earnings management and that the effect of earnings management on cost of debt is not different for the companies audited by the Big Four and for the companies audited by other audit firms. Practical implications The findings of the study can be of interest to policy-makers, regulators, investors and practitioners in emerging markets with an institutional environment similar to that of Kazakhstan. Originality/value The study throws more light on the impact of earnings management and audit quality on cost of debt in Kazakhstan, representing the Central Asian region. This study also extends the current literature by providing empirical evidence that the relationship between earnings management and cost of debt is not affected by audit quality.

Direct and Mediated Associations among Audit Quality, Earnings Quality, and Share Price: The Case of Jordan

“…Furthermore, the current study indicates that high audit quality not improves earnings quality, and this finding not matches with the work of Muttakin et al (2017) and Orazalin and Akhmetzhanov (2019). This result consists with the work of Almarayeh et al (2020).…”

“…They also discussed that audit quality can help to improve earnings quality. This view is supported by the work of Orazalin and Akhmetzhanov (2019), Leuz et al (2003), Wysocki (2005), Latif et al (2017), and Antonio et al (2019). Oroud et al (2019) discussed the role of audit quality in the relationship between the cash flows and accruals with the share price, and they noted that cash flows and accruals have a significant relationship with the share prices.…”

“…They noted that auditor size and audit fees have no significant effect on earnings management. Therefore, it can be noted that numerous studies (Charitou et al, 2001;Balsam et al, 2003;Krishnan, 2003;Khurana and Raman, 2004;Pourheydari and Ahmadi, 2008;Penman and Yehuda, 2009;Muttakin et al, 2017;Orazalin and Akhmetzhanov, 2019;Almarayeh et al, 2020;Kourtis et al, 2019) have investigated the role of audit quality in the quality of financial statements and the share price. Those studies obtained varying and inconsistent findings.…”

Big 4 auditors, bank earnings management and financial crisis in Africa

“…Earnings management is lower among companies hiring a Big 4 audit firm compared to companies hiring the services of a non-Big 4 audit firm. Orazalin and Akhmetzhanov (2019) investigate the effect of audit quality on earnings management and whether the relationship between earnings management and cost of debt is affected by audit quality. They show that higher audit quality (i.e., the presence of a Big 4 auditor) leads to a lower cost of debt but audit quality has no impact on earnings management.…”

Bagaimana Pendanaan Utang Menstimulasi Manajemen Laba ?

“…Sitanggang, Karbhari, Matemilola & Ariff (2019) menunjukkan bahwa semakin tinggi asimetri informasi menghasilkan tingkat praktik manajemen laba yang tinggi. Menurut Orazalin & Akhmetzhanov (2019), manajemen laba semakin mendapat perhatian di antara para pembuat kebijakan, investor, praktisi dan akademisi, karena mampu menyembunyikan kinerja perusahaan yang sebenarnya, serta mengurangi kualitas informasi akuntansi.…”