Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from India

International Journal of Auditing, 2017, DOI 10.1111/ijau.12087

39 Pages Posted: 19 Dec 2011 Last revised: 30 Apr 2017

See all articles by Noor Houqe

Noor Houqe

School of Accountancy

Kamran Ahmed

La Trobe Business School, La Trobe University

Tony van Zijl

Victoria University of Wellington - Te Herenga Waka - Faculty of Commerce and Administration

Date Written: December 1, 2011

Abstract

This study examines the effect of audit quality on earnings management and cost of equity capital of listed companies in India. Our results show that companies employing a high quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand-alone companies but that they benefit less from employing a high quality auditor. Our results are based on a large sample of 7,303 company-year observations on listed companies in India and are robust to alternative measures for our main variables – audit quality, earnings management, and cost of capital – and to tests for endogeneity and the impact of the Global Financial Crisis (GFC). Given the distinctive and unique institutional features of the Indian market such as the dominant role of family business groups in the national economy, large market share of domestic audit firms, less litigious environment, and less effective professional accounting bodies in checking audit failure, our findings make a significant contribution to the literature on the role of audit quality as a corporate governance monitoring mechanism as reflected in the impact on earnings management and cost of equity capital.

Suggested Citation

Houqe, Muhammad Nurul and Ahmed, Kamran and van Zijl, Tony, Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from India (December 1, 2011). International Journal of Auditing, 2017, DOI 10.1111/ijau.12087, Available at SSRN: https://ssrn.com/abstract=1967293 or http://dx.doi.org/10.2139/ssrn.1967293

Muhammad Nurul Houqe (Contact Author)

School of Accountancy ( email )

New Zealand

Kamran Ahmed

La Trobe Business School, La Trobe University ( email )

Kingsbury Drive
Melbourne, VIC 3086
Australia
0403038387 (Phone)
3105 (Fax)

Tony Van Zijl

Victoria University of Wellington - Te Herenga Waka - Faculty of Commerce and Administration ( email )

RH 606, Pipitea Campus, 6th Floor, Rutherford Hous
23 Lambton Quay
Wellington
Australia

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