Audit Quality as a Moderating Mechanism between Earnings Management and Firm Valuation
Keywords:
Earnings Management, Audit Quality, Firm Valuation, Moderation Effect, Corporate Governance, Panel Data Analysis, Emerging Markets, Discretionary Accruals, Financial Reporting Quality, Investor ConfidenceAbstract
This study examines the effect of earnings management on firm valuation and the moderating role of audit quality using panel data from publicly listed non-financial firms over 2019-2024. The empirical results reveal that earnings management has a significant negative impact on firm valuation, with regression estimates showing a coefficient of β = -0.42 (p < 0.01) in the baseline model and β = -0.30 (p < 0.05) after including interaction effects. This indicates that increased managerial manipulation leads to a measurable decline in market value, confirming that investors penalize firms with lower earnings quality.
Audit quality demonstrates a strong positive association with firm valuation, with coefficients of β = 0.35 (p < 0.01) and β = 0.31 (p < 0.01) across models. This suggests that firms audited by high quality auditors benefit from enhanced credibility and higher market valuation. Most importantly, the moderating effect of audit quality is confirmed by the positive and significant interaction term (β = 0.28, p < 0.05), indicating that audit quality weakens the negative impact of earnings management on firm valuation.
The overall model exhibits solid explanatory power, with an adjusted R² of 0.39 and F statistic of 26.32, highlighting the robustness of the findings. Descriptive statistics show that the mean firm valuation (Tobin’s Q) is 1.42, while average earnings management is relatively low (mean = 0.021) and approximately 65% of firms are audited by high quality auditors. Control variables behave consistently with theory: firm size (β = 0.09) and profitability (β = 0.15, p < 0.05) positively affect valuation, whereas leverage has a negative effect (β = -0.12, p < 0.05). Growth opportunities remain statistically insignificant (β = 0.06, p > 0.10).
Overall, the results confirm that earnings management significantly reduces firm value, but high audit quality mitigates this adverse effect, reinforcing its role as effective governance and signaling mechanism in enhancing market confidence.
