[Purpose]This study examines how the proportion of audit firms’ audit revenue affects the cost of equity capital of audited firms.
[Methodology]In this paper, regression analysis is performed based on a Korean sample of 301 observations between the years 2019 and 2020, when the standard audit hours policy was introduced under the revised Act on External Audit of stock companies.
[Findings]This study shows that the higher the ratio of audit revenue to the total sales of audit firms’, the lower the cost of equity capital of the audited firms. This result suggests that when the proportion of audit sales of an audit firm is high, the firm’s cost of equity capital is reduced by accumulating related experiences by focusing on audit service, and improving the quality and reliability of the audited firm’s financial reporting. Specifically, the result is found firms with higher largest shareholder ownership, lower foreign investor equity, and lower governance score of the Korea Corporate Governance Service (KCGS).
[Implications]Unlike most of the literature that considers the size of audit firms as the main characteristic of auditors, this study has a major contribution in that it empirically analyzes the correlation between various characteristics such as the sales structure of audit firms and the cost of equity capital. Furthermore, it provides practical implications that the audited firm should consider the auditor’s financial characteristics, such as sales structure, as well as the reputation and size of the audit firm in a situation where the audit fee burden of listed firms is increasing.