The Relationship Between Independent Audit And Cost Of Equity Capital

Cost of equity has always been the core problem in corporate financial management,because it affects a company's financing and investment,and will ultimately affect the corporate value and shareholder wealth.There are many factors which influence the cost of equity,among which the quality of financial information has the greatest influence.High quality of financial information will reduce information asymmetry between the firm and its investors and agency cost,which has a positive effect on reducing the cost of equity.Existing researches have proved that independent audit,as an effective external governance mechanism,can improve the quality of financial informationand reduce the cost of equity.Previous studies examined the relationship between independent audit and cost of equity at the firm level or the office level,however,there are few studies at the individual signature CPAs level.Chinese independent audit industry starts late which still has many problems.With the happening of a lot of audit frauds,the quality and governance effect of independent audit has been widely questioned by the public.At present,regulation and supervision of the independent audit industry becomes more and more strict,and new accounting and auditing standards have continuously been decreed,which has put forward higher requirements on how to improve audit quality and reduce litigation risk for individual signature CPAs.Based on the current institutional environment,this paper examines the relationship between independent audit and cost of equity at the individual signature CPAs level.This paper selects the data from the Chinese A-share listed companies in Shenzhen and Shanghai from 2013 to 2015 as samples and carries out empirical study on them,verifying:(1)The effect of the annual number of audit reports issued by signature CPAs on the cost of equity;(2)The effect of whether signature CPAs are industry audit specialists on the cost of equity;(3)The effect of audit experience which signature CPAs have on the cost of equity.This paper further examines how different effects of independent audit on cost of equtiy based on the individual level are considering different size of accounting firms,nature of property right,degree of industry competition and client importance.Empirical results show that:(1)Under other constant conditions,the smaller the annual number of audit reports issued by signature CPAs is,the higher audit quality will be,and the lower cost of equity will be;(2)Under other constant conditions,if signature CPAs are industry audit specialists,the higher audit quality will be,and the lower cost of equity will be;(3)Under other constant conditions,the richer audit experience signature CPAs have,the higher audit quality will be,and the lower cost of equity will be;(4)The positive effect of the annual number of audit reports issued by signature CPAs on the cost of equity is more significant in non-international Big 4 firms,domestic non-Top 10 firms,non-state-owned companies,less competitive industries and more important clients;(5)The negative effect of whether signature CPAs are industry audit specialists on the cost of equity is more significant in international Big 4 firms,domestic non-Top 10 firms,non-state-owned companies,less competitive industries and more important clients;(6)The negative effect of the audit experience which signature CPAs have on the cost of equity is more significant in non-international Big 4 firms,non-state-owned companies,less competitive industries and more important clients,but this effect is not more significant in domestic non-Top 10 firms.