The mediating effect of accruals quality on the relationship between audit committee characteristics and the cost of capital: Empirical evidence from Thailand

Abstract

This study aimed to investigate the mediating effects of accrual quality on the relationship between audit committee characteristics and the cost of capital. The audit committee characteristics consisted of accounting experts, legal experts, multiple directorships, the tenure of audit committee members, female audit committee members, audit committee independence, audit committee size, meeting frequency, and audit committee members’ ages. The cost of capital was defined as the cost of debt and the cost of equity. The samples used in the study were listed Thai non-financial companies from 2010 to 2012. Univariate correlations and multivariate statistical analysis, which are multiple regression models, were used in this study at 95% confidence interval. The results of the study showed that firms with a low accrual quality had a low cost of debt and a low cost of equity. The accrual quality was a mediating variable between audit committee characteristics and the cost of capital. The findings were not consistent with previous researches. Firms with an increased multiple directorships and older audit committee members had a high accrual quality and a high cost of capital. Firms with a decreased audit committee size had a high accrual quality and a low cost of capital. The results also showed that firms with more audit committee accounting experts, a higher audit committee independence, and a larger audit committee size had a low cost of debt. Firms with less audit committee meeting frequency and young audit committee members had a low cost of debt. Furthermore, firms with low multiple directorships had a low cost of equity. The effects of audit committee meeting frequency, audit committee members’ ages, and multiple directorships on the cost of capital were not consistent with previous researches. According to the Thai investors’ perspectives, audit committees meeting more often might show that the companies had problems that needed be solved or lacked planning. Audit committees were likely to be old, had an obsolete view on work, and work inefficiently. Moreover, audit committee members who served on various boards might not have enough time to monitor the specific committee effectively. These problems resulted in the high cost of capital. In conclusion, these results revealed that audit committee characteristics, consisting of accounting experts, audit committee independence, audit committee size, meeting frequency, and audit committee members’ ages, had direct effects on the cost of capital. Multiple directorships, audit committee size, and audit committee members’ ages had indirect effects on the cost of capital through accrual quality as a mediating variable. Apart from this, the regulators could use the findings to promote the benefits of implementing good corporate governance or giving incentives to listed firms to practice better corporate governance in order to better protect investors in the Thai capital markets. In addition, investors could make better investment decisions based on the quality of the audit committee characteristics.