How Accounting and Auditing Regulations Affect Growth and Cost of Capital

A second-year doctoral student in Microdata Analysis, Asif M Huq chose to study the effects of regulations on firm dynamics. On September 25, 2018, he defended his licentiate thesis.

Portrait Asif M Huq

The licentiate thesis provides an understanding as to how new audit regulations affect firm growth and how audits affect the cost of capital. To investigate the effect of audit reforms on employment growth, Asif M Huq focused on a Swedish reform from November 2010 that allows certain firms to opt out of previously imposed statutory audits.

The results demonstrate that firms that fulfilled the requirements for voluntary auditing compared with a control group of similar firms that did not increased their employment growth rate by 0.39%. Furthermore, the results demonstrate that firms with audited financial statements saved on average 1.26 percentage points on the cost of debt compared with firms with unaudited financial statements. Since the audit helps reduce debt costs, the reform creates opportunities for companies that want to grow through investment in capital to do so by reducing the cost of such investments through auditing.

"The reform creates a possibility for firms that have the ambition to grow in employment to do so by not auditing," states Asif M Huq.

The current ceiling of the reform is likely to force some firms to operate at sub-optimal levels, those that do not have the option to opt out of audit even though they might not accrue any benefit from auditing, at least in the short term.

"Therefore, a higher threshold will give more firms the possibility to adopt the auditing practices that they find most suitable to the firm, while auditors can improve their efficiency by concentrating on larger firms to a higher extent," states Asif M Huq.

Asif M Huq will continue his studies towards a doctoral thesis. So far his studies have investigated both how decisions taken outside the firm affect firm dynamics and what the effect of formal rules is.

"In the second part of the thesis, I will also investigate how firms behave in the absence of formal rules and in the presence of informal constraints. I will also investigate how decisions are taken inside the firm and how those decisions affect the outside environment and firm performance."

Asif M Huq defended his licentiate thesis "How accounting and auditing regulation affect company growth and cost of debt?" on September 25, 2018.

Link to licentiate thesis

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