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

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. (C) 2015 Elsevier B.V. All rights reserved.