Impact of Excess Auditor Remuneration on Cost of Equity Capital Around the World
University of Toronto - Rotman School of Management
Oklahoma State University - School of Accounting
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
Yong Keun Yoo
Korea University Business School
Journal of Accounting, Auditing and Finance, Forthcoming
This study examines the relation between excess auditor remuneration and the implied required rate of return (IRR hereafter) on equity capital in global markets. We conjecture that when auditor remuneration is excessively large, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence. This perceived lack of independence increases the information risk associated with the credibility of financial statements, thereby increasing IRR. Consistent with this notion, we find that IRR is increasing in excess auditor remuneration, but only in countries with stronger investor protection. Finding evidence of a relation only in stronger investor protection countries is consistent with the more prominent role of audited financial statements for investors' decisions in these countries. In settings where investors are less likely to rely on audited financial statements and instead rely on alternative sources of information (i.e., in countries with weaker investor protection), the impact of client/auditor bonding should have less of an effect on investors' decisions.
Keywords: Auditing, auditor independence, economic bonding, cost of equity capital, international, investor protection
JEL Classification: F23, G15, G30, G38, M41, M49Accepted Paper Series
Date posted: April 17, 2008
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