The Effect of Audit Quality on the Relationship of Collateral Assets with Financing and Investment

Abstract

This research investigates the effect of audit quality on the relationship of collateral value of assets with the firm's financing and investment decisions. Moreover, the firms' audit quality responses to the change in firm's real estate assets were examined. We used changes in a firm’s collateral values caused by changes in real estate prices as an exogenous change to the financing capacity of a firm. The audit firms ranks (carried out by Iranian Association of Certified Public Accountant (IACPA)) were used as a proxy of audit quality. A sample consists of 126 firms listed in the Tehran Stock Exchange for the period 2007 to 2014, 1003 firm-year observations, and multivariate regressions in panel data mode were used to test the hypotheses. The results show that financing and investment by firms with higher audit quality is less affected by changes in real estate values than are financing and investment by firms with lower audit quality. Further, firms select auditors with higher quality in response to decreases in financing capacity. The results also show that changes in collateral value have a significant negative effect on the investment of firms that are more likely to under-investment and audit quality plays decreasing role in this relation.

Keywords

• audit quality
• collateral value
• financing
• investment