Does audit quality provide a better-managed capital?: Evidence from Saudi listed firms

This study examines the relation between audit quality and firm's performance. Consistent with prior research, this paper treats audit quality as a dichotomous variable and assumes that Big Four auditors are of higher quality than non-Big Four auditors. Due to self-interest perspective, prior theories of ownership and management argue that keeping shareholders out of managerial responsibilities give management powers and intern benefit their self than acting to serve the interest of the business ownership influencing the firm's performance. Prior literature suggests that auditors have an important role in reducing conflict of interest between managements and the shareholders as they provide assurance engagement service, which positively influences the firm's performance. Therefore, this paper hypothesizes that clients of higher audit quality have less agency problems, which in turn better firm’s performance. To test this hypothesize, this study collects data manually from financial reports of all non-financial Saudi firms listed on the Saudi Stock Exchange for fiscal years ending 2017 – 2019. This paper regresses audit quality on measurement of firm's performance (return on equity (ROE) and return on assets (ROA)) using a number of models including the use of pooled ordinary least square (OLS), fixed effect (FE) and random effect (RE), and Probit models. Consistent with expectation, this paper finds that firms audited by big four have a better ratio of ROA by approximately 15.1%, and better ratio of ROE by approximately 17.3% compared to firms audited by non-big four.