The Effects of Audit Quality on Earnings Management and Cost of Equity Capital

Separation of ownership from management, scandal of big firms, financial crises, disorder of capital markets and. .. lead to disappear Investors’ confidences and cause to increase their concerns of capital market. The purpose of this research is to investigate the relationship between “independent audit quality” as an independent variable, and “earnings management” and “cost of equity capital” as dependent variables. Market shares of the audit companies used for calculating auditor industry specialization as an audit quality proxy. Earnings management was calculated through discretionary accruals, using modified Jones model. Considering some characters, statistical society includes 147 listed companies on Tehran Stock Exchange during 1386 to 1389. The results show, a converse relationship exists between audit quality and earnings management. Furthermore, cost of equity capital decreases via increasing audit quality. In the other words, there is a significant relationship between variables.