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Audit quality attributes, client size and cost of equity capital


  • Guy D. Fernando
  • Ahmed M. Abdel-Meguid
  • Randal J. Elder


Purpose - The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client firm's cost of equity capital. Design/methodology/approach - The paper uses empirical data to construct a measure of Findings - The paper finds that auditor size (auditor is a member of the BigX), auditor industry specialization and auditor tenure are negatively associated with the client firm's cost of equity capital. However, the paper finds that this effect is limited only to small client firms, potentially reflecting the poor information environment associated with such firms. Practical implications - The study highlights the importance of audit quality attributes in determining the firm's cost of capital. It also highlights ways in which firms (especially small firms) can reduce the cost of equity capital by improving their information environment through the judicious selection of auditors. Originality/value - This is believed to be the first paper to examine whether the effects of three audit quality attributes (auditor size, auditor industry specialization and auditor tenure) on a firm's cost of capital are dependent on the client's size. The paper empirically shows that such effects are more pronounced for smaller clients.

Suggested Citation

  • Guy D. Fernando & Ahmed M. Abdel-Meguid & Randal J. Elder, 2010. "Audit quality attributes, client size and cost of equity capital," Review of Accounting and Finance, Emerald Group Publishing, vol. 9(4), pages 363-381, November.
  • Handle: RePEc:eme:rafpps:v:9:y:2010:i:4:p:363-381

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    References listed on IDEAS

    1. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    2. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. repec:bla:joares:v:28:y:1990:i::p:55-76 is not listed on IDEAS
    5. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
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    Cited by:

    1. 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.


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