Financial Capacity and the Demand for Audit Quality
Accounting and Business Research, Forthcoming
53 Pages Posted: 20 Nov 2020
Date Written: October 3, 2020
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: Suggested Citation