Impact of Excess Auditor Remuneration on Cost of Equity Capital Around the World

Posted: 17 Apr 2008

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Tony Kang

University of Nebraska - Lincoln

Wayne B. Thomas

University of Oklahoma

Yong Keun Yoo

Korea University Business School

Multiple version iconThere are 2 versions of this paper

Abstract

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, M49

Suggested Citation

Hope, Ole-Kristian and Kang, Tony and Thomas, Wayne B. and Yoo, Yong Keun, Impact of Excess Auditor Remuneration on Cost of Equity Capital Around the World. Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1121766

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Tony Kang

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Yong Keun Yoo

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

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