Audit quality, earnings quality and the cost of equity capital

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Conference Proceeding
2009 AFAANZ Conference, 2009, pp. 1 - 31
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We investigate the influence of audit quality on the relation between earnings quality and cost of equity capital. We utilize total accruals as a measure of earnings quality and auditor choice, auditor effort and auditor opinion based audit quality proxies used in the prior literature for audit quality dimensions to estimate a cost of equity model for a sample of firm years where auditing and audit quality is likely to be in higher demand. We find that higher audit quality is associated with significant mitigation of the positive relation between total accruals and the cost of equity capital and the presence of a qualified audit opinion issued by the auditor increases the extent to which lower quality accruals are associated with an increased cost of equity capital.
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