Association between Big 4 Auditor Choice and Cost of Equity Capital for Multiple‐Segment Firms

29 Pages Posted: 4 Mar 2014

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Woo-Jong Lee

Seoul National University

Date Written: March 2014

Abstract

Prior studies document a negative association between Big 4 auditor choice and the implied cost of equity capital, suggesting that Big 4 auditors mitigate information asymmetry (IA) between shareholders and managers. This study extends this line of research and reports that the negative association is more pronounced in multiple‐segment firms, where IA is more severe than in single‐segment firms. We also find that the association between Big 4 auditor choice and the cost of equity capital becomes more negative as the number of segments increases. Taken together, our findings suggest that the role of Big 4 auditors in reducing the cost of equity capital becomes more significant when greater IA exists.

Keywords: Audit quality, Cost of equity capital, Multiple‐segments firms, Information asymmetry

Suggested Citation

Choi, Jong and Lee, Woo-Jong, Association between Big 4 Auditor Choice and Cost of Equity Capital for Multiple‐Segment Firms (March 2014). Accounting & Finance, Vol. 54, Issue 1, pp. 135-163, 2014. Available at SSRN: https://ssrn.com/abstract=2404093 or http://dx.doi.org/10.1111/acfi.12011

Jong Choi (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Woo-Jong Lee

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

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