Audit Quality and Cost of Capital Among Nigerian Listed Firms

This study investigates the nexus between audit quality and the cost of capital among Nigerian listed firms over the period 2011 to 2025, using an unbalanced panel dataset comprising 148 firms drawn across twelve sectors of the Nigerian Exchange Group (NGX). Audit quality is proxied through two complementary measures: Big 4 auditor affiliation and discretionary accruals estimated via the modified Jones (1991) model. The cost of capital is captured using three dependent constructs — cost of equity capital (COE), cost of debt capital (COD), and weighted average cost of capital (WACC). Control variables include firm size, leverage, profitability, growth opportunities, board independence, ownership structure, beta (market risk), debt-to-equity ratio, inflation rate, interest rate, audit firm size, and audit tenure. Employing fixed-effects panel regression with Driscoll-Kraay standard errors to account for heteroskedasticity, serial correlation, and cross-sectional dependence, the results consistently reveal that higher audit quality significantly reduces the cost of equity, debt, and overall capital. Big 4 affiliation exerts a significant negative influence on all three cost-of-capital measures. Audit tenure, by contrast, is positively associated with capital costs, suggesting that prolonged auditor–client relationships may erode audit independence over time. These findings are robust to alternative model specifications and are consistent with information asymmetry theory, agency theory, and the signalling hypothesis. The study contributes novel evidence from the largest sub-Saharan African capital market and yields actionable insights for regulators, investors, boards of directors, and standard-setters.