The Effect of Audit Quality on Organization Capital

Abstract

The current study examines how audit quality affects firms’ intangible investments. Employing a sample of 33,518 firm-year observations of US-listed firms for the period 1999-2017, our empirical findings suggest that firms’ organization capital which is considered as the primary variable of a firm’s intensity of intangible investments, is associated with high audit quality measured by audit firm size, auditor tenure and audit fees. Sensitivity tests, alternative measures of organization capital, subsample analyses and tests for endogeneity issues indicate that the effect of audit quality on organization capital intensity remains valid. Our findings provide new insights in the related literature by showing that audit quality adds to the development of intangible investments, contributing to firms’ long-term performance horizon.

Keywords: Audit quality, Organization Capital, Audit Fees, Audit Tenure.

JEL Classification: E22; G30; G32; G10; G12; G14; G30