Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization

Posted: 13 Aug 2014 Last revised: 3 Mar 2016

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Jay Junghun Lee

University of Massachusetts Boston

Jong Chool Park

University of South Florida - School of Accountancy

Date Written: July 31, 2014

Abstract

This study investigates the monitoring role of high-quality auditors defined as office-level industry specialists in the stock market valuation of cash assets. We find that the market value of cash holdings is significantly higher for the client of an industry specialist auditor. The marginal value of cash is 34 cents higher for the client of a joint industry specialist at both the national and city levels than for the client of a non-specialist. We also find that cash holdings are more closely associated with capital investment and the market value of capital investment is significantly higher when the auditor is a joint industry specialist. Moreover, we find that the value of cash increases significantly when the client changes its auditor to a joint industry specialist. Our findings hold even after controlling for the client’s governance efficacy and financial reporting quality. Our results provide new insight into the mechanism through which high-quality audits affect firm value: External audits facilitate shareholders’ monitoring over managerial cash expenditures, thereby leading market participants to attach a higher value to cash holdings.

Keywords: audit quality, auditor industry specialization, cash holdings, capital expenditures, cash management efficiency

JEL Classification: M42, G32, G34

Suggested Citation

Kim, Jeong-Bon and Lee, Jay Junghun and Park, Jong Chool, Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization (July 31, 2014). Auditing: A Journal of Practice & Theory, 34 (2), 2015, pp. 27-57., Available at SSRN: https://ssrn.com/abstract=2479518

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Jay Junghun Lee (Contact Author)

University of Massachusetts Boston ( email )

College of Management
100 Morrissey Blvd.
Boston, MA 02125
United States
(617)287-3181 (Phone)

Jong Chool Park

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

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