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

Jong-Hag Choi, Woo-Jong Lee and Steven Cahan

Accounting and Finance, 2014, vol. 54, issue 1, 135-163

Abstract: type="main" xml:id="acfi12011-abs-0001">

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.

Date: 2014
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