Audit Quality Attributes, Client Size and Cost of Capital

41 Pages Posted: 2 Oct 2005 Last revised: 17 Aug 2008

See all articles by Guy Dinesh Fernando

Guy Dinesh Fernando

SUNY Albany

Randal J. Elder

Syracuse University

Ahmed M. Abdel-Meguid

The American University in Cairo - School of Business

Date Written: April 2008

Abstract

We investigate the effects of audit quality attributes related to the auditor and the auditor-client relationship on the firm's cost of capital. We further examine whether these effects differ according to client size. We focus on two auditor characteristics; auditor size and auditor industry specialization and two auditor-client relationship characteristics; auditor tenure and the auditor's opinion. We use the client firm's cost of capital as a proxy for the degree to which the market values these quality attributes.

Auditor size, industry specialization, tenure and type of auditor opinion are important determinants of perceived audit quality. The first three characteristics are negatively related to the cost of capital. We also find that that the client firm's cost of capital increases if the auditor issues any opinion other than a clean opinion. These results are driven by small clients, suggesting audit quality attributes are highly appreciated for smaller clients.

Keywords: Cost of capital, audit firm size, auditor specialization, information and monitoring

JEL Classification: M49

Suggested Citation

Fernando, Guy Dinesh and Elder, Randy and Abdel-Meguid, Ahmed M., Audit Quality Attributes, Client Size and Cost of Capital (April 2008). Available at SSRN: https://ssrn.com/abstract=817286 or http://dx.doi.org/10.2139/ssrn.817286

Guy Dinesh Fernando (Contact Author)

SUNY Albany ( email )

1400 Washington Avenue
Building, Room 109
Albany, NY 12222
United States
518-442-4930 (Phone)

Randy Elder

Syracuse University ( email )

900 S. Crouse Avenue
School of Management Department of Accounting
Syracuse, NY 13244
United States
315-443-3359 (Phone)
315-443-5457 (Fax)

Ahmed M. Abdel-Meguid

The American University in Cairo - School of Business ( email )

The American University in Cairo (AUC)
School of Business
New Cairo, 11835
Egypt

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