Chapter 1 provides evidence on value-enhancing role of independent audit in U.S. stock market. Economic theories predict that independent audit performs a governance role and enhances the value of a public firm (Jensen and Meckling 1976; Watts and Zimmerman 1983). This paper provides evidence that independent audit enhances equity value through improving investment efficiency. Employing the firm’s audit fees as a measure of the level of audit services, we find that (1) high level of independent audit is associated with greater investment efficiency, (2) The relation of equity value and the level of audit is higher for firm with greater investment opportunities, (3) the relation of equity value and the level of audit is stronger for firms with investment financed by equity compa...[ Read more ]

Chapter 1 provides evidence on value-enhancing role of independent audit in U.S. stock market. Economic theories predict that independent audit performs a governance role and enhances the value of a public firm (Jensen and Meckling 1976; Watts and Zimmerman 1983). This paper provides evidence that independent audit enhances equity value through improving investment efficiency. Employing the firm’s audit fees as a measure of the level of audit services, we find that (1) high level of independent audit is associated with greater investment efficiency, (2) The relation of equity value and the level of audit is higher for firm with greater investment opportunities, (3) the relation of equity value and the level of audit is stronger for firms with investment financed by equity compared with firms financed by debt, and (4) the Sarbanes–Oxley Act enhances the relation of equity value and the level of audit which is not due to the reduction of non-auditing services. Taken together, our empirical results strongly support the value-enhancing role of independent audit, as predicted by economic theories of the firm.

Chapter 2 examines the effects of government corruption and independent audit on shareholders’ wealth across countries. We present a simple model where insiders have the power to divert the firm’s resources for personal use, government officials expropriate the proceeds from investment with positive probability, and an independent auditor can detect the diversion by the insiders. Our model predicts that (1) corruption has a negative effect on equity value because insiders’ incentives to divert resources increase with the level of corruption; (2) independent audit has a positive effect on equity value by deterring insiders’ diversion; and (3) the positive effect of independent audit on equity value is stronger in countries that are more corrupt. With a comprehensive data on audit fees from 30 countries for the period 1995–2012, we report empirical results that are consistent with the theoretical predictions. Overall, our findings suggest that government corruption and independent audit have opposite effects on equity value and that auditing plays a more important disciplining role in countries with higher levels of corruption.