Cross-Country Evidence on the Importance of Big Four Auditors to Equity Pricing: The Mediating Role of Legal Institutions

70 Pages Posted: 9 Mar 2010 Last revised: 22 Dec 2014

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: December 1, 2014

Abstract

We report large sample evidence on the importance of auditor choice to the ex ante cost of capital for public firms from 37 countries. In regressions that control for country, industry, and year fixed effects as well as other firm-level determinants, we find that corporate equity financing worldwide is cheaper when Big Four auditors monitor the financial reporting process, although this relation is weaker outside the U.S. where the implicit insurance coverage that auditors afford investors is much lower. Economically, our coefficient estimates imply that U.S. and non-U.S. public firms’ cost of equity capital falls by, on average, 71 and 26 basis points, respectively, in the presence of a Big Four auditor. We also provide empirical support for the predictions that the equity pricing role of Big Four auditors is stronger in countries with better institutions governing investor protection and disclosure standards.

Keywords: Audit Quality, Corporate Governance, Cost of Equity

JEL Classification: G34, G32

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Pittman, Jeffrey A., Cross-Country Evidence on the Importance of Big Four Auditors to Equity Pricing: The Mediating Role of Legal Institutions (December 1, 2014). Available at SSRN: https://ssrn.com/abstract=1567524 or http://dx.doi.org/10.2139/ssrn.1567524

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami (Contact Author)

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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