Maya Thevenot

The Information Environment and Cost of Capital

In empirical tests guided by recent theory (e.g., Hughes, Liu and Liu 2007; and Lambert, Leuz and Verrecchia 2011), we examine the joint effects of information precision, information asymmetry and the level of market competition on firms’ cost of equity capital. Consistent with theory, we find that average information precision and the level of market competition reduce the positive effect of information asymmetry but do not eliminate it. Besides examining various aspects of the environment jointly, our study is also unique in that we follow the suggestions of Sheng and Thevenot (2012) for modifying the Barron, Kim, Lim and Stevens (1998) measures of information asymmetry and precision. We find that cost of equity capital varies greatly with the modified measures of information asymmetry and average information precision. For example, our regression estimates suggest that information asymmetry and average information precision are more important than equity beta and firm size in determining firms’ cost of capital, and that such a substantial effect from information asymmetry and information precision is not apparent using unmodified BKLS measures.

Auditor Switches in the Post-SOX Era: The Case of Firms with Internal Control Weaknesses

Recent changes in the regulatory environment require that auditors express an opinion on the design and effectiveness of their clients’ internal controls. This shift likely impacted auditor-client relationships negatively, especially for firms that receive an adverse internal controls opinion. As a result, such firms may either switch or remain with their incumbent auditors. In this paper, we study the factors that affect this choice. We find that the severity of the internal control problems, the auditor-related fees, the length of auditor-client relationships and the presence of a Big 4 auditor affect the probability that a firm switches auditors. Further analyses examine the factors that affect auditor dismissals and resignations, as well as switches involving Big 4 auditors.