Financial Capacity and the Demand for Audit Quality

53 Pages Posted: 20 Nov 2020

See all articles by Chee Yeow Lim

Chee Yeow Lim

Singapore Management University - School of Accountancy

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Pingui Rao

Jinan University - Management School

Heng Yue

Singapore Management University - School of Accountancy

Date Written: October 3, 2020

Abstract

Prior research documents that financial capacity could be positively or negatively associated with the demand for audit quality. We re-examine this relation using changes in local real estate prices as exogenous shocks to corporate financial capacity. Using auditor size, auditor industry specialization, and auditor fees as measures of audit quality, we find robust evidence that an increase (decrease) in financial capacity significantly reduces (increases) the demand for audit quality, and that this relation is more pronounced when firms are more financially constrained, when external monitoring by institutional investors and financial analysts is weaker, and when there is more negative news about real estate price changes. Our study enriches the related literature by describing a more complete and dynamic relationship between audit quality and financial capacity.

Keywords: Audit Quality; Financial Capacity; Real Estate; Financial Constraint

JEL Classification: G12; M41; M42

Suggested Citation

Lim, Chee Yeow and Lobo, Gerald J. and Rao, Pingui and Yue, Heng, Financial Capacity and the Demand for Audit Quality (October 3, 2020). Accounting and Business Research, Forthcoming, Singapore Management University School of Accountancy Research Paper No. 2021-129, Available at SSRN: https://ssrn.com/abstract=3700648 or http://dx.doi.org/10.2139/ssrn.3700648

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Pingui Rao (Contact Author)

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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