Auditing Quality and the Cost of Equity Capital

In this paper, we examine the relationship between auditing quality and the cost of equity capital by building a model that is consistent with the CAPM. Our model predicts that cost of capital decreasing with auditing quality. The results of our regressions strongly support the above prediction by using a system of three simultaneous equations to furtherly control self-selection bias, there is a negative relationship between auditing quality and the cost of equity capital.