Audit quality and the market value of cash: the role played by the Big 4 auditor in Latin America

Abstract Despite the extensive discussion in the accounting literature regarding the importance of internal control for the proper allocation of corporate resources, little is known about the role of auditors as a governance mechanism in reducing agency costs related to cash resources. This study extends the literature that explores differences in audit quality by examining whether perceived audit quality, measured by the Big 4/non-Big 4 dichotomy, mitigates the value destruction associated with cash. To the extent that investors do not perceive Big 4 auditors, as opposed to non-Big 4 auditors, as effective in preventing the potential value destruction associated with cash holdings or enhancing the contribution of cash to firm value in Latin America, our article is the first to document that investors do not assign a statistically significant premium to the cash balances of Big 4 clients. The results hold after a series of robustness checks and additional analyses. Our article enriches the literature on audit quality, corporate governance and cash holdings by demonstrating no statistically significant influence of auditor choice on the value investors place on cash reserves in a weak legal environment, i.e., where minority shareholders are poorly protected. Our conclusions have important implications for investors and lenders looking to Latin America to diversify their investments, as our findings about audit quality can influence their investment decisions. This study also has practical implications for the debate concerning the role played by audit quality.