Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    Audit quality and the market value of cash holdings: the...
    research summary posted July 30, 2015 by Jennifer M Mueller-Phillips, tagged 05.0 Audit Team Composition, 05.02 Industry Expertise – Firm and Individual, 11.0 Audit Quality and Quality Control, 11.04 Industry Experience 
    176 Views
    Title:
    Audit quality and the market value of cash holdings: the case of office-level auditor industry specialization.
    Practical Implications:

    While theoretical literature has extensively examined the link between audit quality and firm value, very little empirical evidence has been provided as to the potential channels in which high-quality audits enhance firm value. This study extends and complements the existing line of research by providing useful insights into the role of audit quality in constraining managerial diversion or misuse of corporate cash resources. The results of this study are useful in assessing the effects of audit quality on firm value, specifically the market value of cash holdings.

    Citation:

    Kim, J. B., J. J. Lee, and J. C. Park. 2015. Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization. AUDITING: A Journal of Practice & Theory 34 (2): 27-57.

    Keywords:
    audit quality, auditor industry specialization, capital expenditures, cash holdings, cash management efficiency
    Purpose of the Study:

    In the past, research has been conducted in regards to the impact of managerial cash expenditures on the market value of cash holdings within corporations. Specifically, the misuse of corporate cash resources by management has been shown to result in investors discounting the value of cash holdings. This study investigates the monitoring role of high-quality auditors defined as office-level industry specialists in the stock market valuation of cash assets. The authors pose the idea that high-quality audits facilitate external discipline, thereby preventing potential misuse of cash holding and the associated destruction of cash values.  The study aims to provide large-sample, systematic evidence on whether higher-quality audits contribute to an increase in the market value of cash holdings.

    Design/Method/ Approach:

    Once problematic data were excluded, the sample consisted of 14,688 Big 4 client-year observations for publicly traded U.S. companies over the sample period of 20032011. The relation between audit quality and the market value of cash holdings was investigated by applying a regression model developed in previous research. The authors controlled for certain factors that have been previously shown to affect the market value of cash, including audit financial reporting quality and corporate governance.

    Findings:

    Overall, the results of the study support the idea that higher-quality audits contribute to an increase in the market value of cash holdings. Specifically:

    • The market value of cash is significantly higher for firms audited by local practice offices with both national and city-specific industry specialization.
    • The marginal value of cash is 34 cents higher for the client of a joint industry specialist at both the national and city levels than for the client of a non-specialist.
    • The positive association between joint-industry specialization and the value of cash holdings is more significant than those of national-only or city-only industry specialization.
    • When the auditor has joint-industry specialization, cash holdings are more closely associated with capital investment, and the market value of capital expenditures is significantly higher.
    • The market value of cash holdings increases significantly following the change of auditors to joint-industry specialists.
    Category:
    Audit Quality & Quality Control, Audit Team Composition
    Sub-category:
    Industry Expertise – Firm and Individual, Industry Experience