Research affects audit quality on the cost of capital using the meta-analysis method

Abstract

The impact of audit quality on the cost of capital has been extensively studied; however, research findings remain inconsistent and contradictory as of the year 2024. Through a meta-analysis, the author investigates the effect of audit quality on the cost of capital using a sample of 24 academic articles, encompassing 45 effect sizes published between 2007 and 2024. This study represents a pioneering effort to examine the impact of audit quality on the cost of capital by systematically applying the meta-analytic procedure to assess the significance of the estimated average effect size at both the overall level and across specific dimensions of audit quality measurement. Audit quality, in general, as well as audit quality measured by the presence of Big N audit firms and by alternative approaches, is found to have a negative relationship with the cost of capital. This finding is consistent with agency theory and signaling theory, which suggest that higher audit quality reduces information asymmetry and perceived risk, thereby lowering the cost of capital. However, audit quality measured by audit fees also shows a negative effect on the cost of capital, but this effect is not statistically significant. These findings provide a solid foundation for managers and policymakers to strengthen investment in activities that enhance audit quality and improve the transparency of financial reporting, which in turn helps reduce the cost of capital.