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Cost of capital, audit and earnings quality under financial crisis: A global empirical investigation

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  • Persakis, Anthony
  • Iatridis, George Emmanuel

Abstract

This paper investigates the cost of capital and the changes of audit quality and earnings management influencing on it due to financial crisis of 2008. Using linear regression analysis, 137,091 firm-year observations from 18 advanced countries worldwide which are categorized into three clusters as per level investor protection based on country classification of Leuz (2010) are used in the sample. The results show that the global financial crisis of 2008 has had positive impact on the cost of equity capital for all clusters and the cost of debt for clusters 1 and 2. The cost of equity is negatively associated with firms that are audited by Big Four auditors and have an audit committee in all clusters, and with firms that switch auditors in cluster 2. Firms that are audited by Big Four auditors in cluster 1, firms with a modified audit report in cluster 2 and firms that have an audit committee in cluster 3 have a negative association with the cost of debt. This study also shows that the association between earnings quality attributes and cost of capital is significantly negative before and during the crisis. Overall, our findings offer crucial insights to post crisis management, auditors, regulators and accounting standard setters in stabilizing investors’ confidence and enhancing firm growth after the 2008 financial crisis.

Suggested Citation

  • Persakis, Anthony & Iatridis, George Emmanuel, 2015. "Cost of capital, audit and earnings quality under financial crisis: A global empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 3-24.
  • Handle: RePEc:eee:intfin:v:38:y:2015:i:c:p:3-24
    DOI: 10.1016/j.intfin.2015.05.011
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    Cited by:

    1. Mao, Yaping & Renneboog, Luc, 2015. "Do managers manipulate earnings prior to management buyouts?," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 43-61.
    2. Mittal, Amit & Garg, Ajay Kumar, 2016. "How do Indian firms cope with a crisis? Earnings management characteristics of CNX Nifty 100 companies," MPRA Paper 85353, University Library of Munich, Germany.
    3. Oksana Viktorovna Kuchmaeva & Elena Aleksandrovna Maryganova & Olga Anatolievna Mahova & Tatyana Pavlovna Maksimova, 2017. "Implementing the Concept of Sustainable Development in Russia: Developing the Childhood Infrastructure," European Research Studies Journal, European Research Studies Journal, vol. 0(4B), pages 522-535.
    4. Persakis, Anthony & Iatridis, George Emmanuel, 2016. "Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 73-101.
    5. Alena Anatolievna Uksumenko & Irina Aleksandrovna Kuzmicheva & Olga Yurievna Vorozhbit, 2017. "Effective Marketing Strategy for Regional Banks," European Research Studies Journal, European Research Studies Journal, vol. 0(4A), pages 558-567.
    6. Persakis, Anthony & Iatridis, George Emmanuel, 2017. "The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 1-29.
    7. Sanoran, Kanyarat (Lek), 2018. "Auditors’ going concern reporting accuracy during and after the global financial crisis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(2), pages 164-178.
    8. Batten, Jonathan A. & Lucey, Brian M. & Peat, Maurice, 2016. "Gold and silver manipulation: What can be empirically verified?," Economic Modelling, Elsevier, vol. 56(C), pages 168-176.

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