The Role of Audit Quality in Reducing Agency Costs and Cost of Equity Capital -An Empirical Study on Companies listed in the Egyptian Stock Exchange

Document Type : Original Article

Authors

1 Accounting Department

2 Accounting Department Faculty of Commerce Alexandria University Alexandria Egypt

Abstract

The purpose of this study is to examine the role of audit quality proxied by auditor's firm size and auditor's industry specialization in reducing agency costs and cost of equity capital. The study further contributes to prior literature by investigating whether these two roles will differ according to size of the audit client by classifying sampled firms based on their market capitalization. The study utilized regression model analysis using 111 for a sample of nonfinancial firms listed in the Egyptian Stock Exchange for the period from 2013 to 2016, comprising 444 firmyear observations. Results show a positive and significant relationship between audit quality (auditor's firm size, auditor's industry specialization) and asset utilization ratio as the proxy for agency costs, providing evidence that audit quality can contribute in reducing agency costs. However, results did not show statistical significance for the effect of audit quality proxied by auditor's firm size on cost of equity capital. In contrast, results show statistical significance for the effect of audit quality proxied by auditor's industry specialization on the cost of equity capital. Finally, the study provided that the role of audit quality is more pronounced in smaller clients than in larger clients.

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