Audit Report Lag and Cost of Equity Capital: How do investors deem audit report lag? Evidence from France

Abstract

This research investigates the impact of external audit report lag on the cost of equity capital and how investors perceive audit report lag.

We posit that a longer audit report lag is associated with a higher cost of equity capital because a lengthier audit report arouses investors' mistrust concerning accounting practices and the credibility of reported financial information, which increases the cost of equity capital in return.

For the contributions of the study and to the best of our knowledge, this paper is the first to study the impact of audit report lag on the cost of equity capital in the French context.

Using a sample of the 881 listed French companies and 34,950 firm-year observations from 2008 to 2021, we find that firms with higher audit report lag have a higher cost of equity capital. Investors link extended audit delay to a lack of transparency, issues in financial reporting, and higher business risks (such as dubious accounting practices and adverse or disclaimer opinions) due to information asymmetry.

Our findings have implications for companies, investors, auditors, and regulators as they highlight that firms' cost of equity capital is positively associated with the audit report lag. Our findings contribute to the ongoing debates concerning the impact of audit report lag by emphasizing its impact on financing costs.

As for limitations, we mention that there is no flawless approach to estimating the cost of equity capital. Even if the adopted measurements of the cost of equity capital in this research have wide empirical support, the measurements can be improved.

Keywords: Audit report lag, cost of equity capital, quality of information, improved decision-making, information asymmetry

Classification JEL : M40

Paper type : Empirical Research