Association between Big 4 auditor choice and cost of equity capital for multiple-segment firms

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

24 Scopus Citations
View graph of relations

Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)135-163
Journal / PublicationAccounting and Finance
Volume54
Issue number1
Online published21 Jan 2013
Publication statusPublished - Mar 2014
Externally publishedYes

Abstract

Prior studies document a negative association between Big 4 auditor choice and the implied cost of equity capital, suggesting that Big 4 auditors mitigate information asymmetry (IA) between shareholders and managers. This study extends this line of research and reports that the negative association is more pronounced in multiple-segment firms, where IA is more severe than in single-segment firms. We also find that the association between Big 4 auditor choice and the cost of equity capital becomes more negative as the number of segments increases. Taken together, our findings suggest that the role of Big 4 auditors in reducing the cost of equity capital becomes more significant when greater IA exists.

Research Area(s)

  • Audit quality, Cost of equity capital, Multiple-segments firms, Information asymmetry