Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?

Dalwai, T ORCID: https://orcid.org/0000-0001-5754-5384, Habib, AM, Mohammadi, SS and Hussainey, K, 2023. Does managerial ability and auditor report readability affect corporate liquidity and cost of debt? Asian Review of Accounting, 31 (3), pp. 437-459. ISSN 1321-7348

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Abstract

Purpose: This study investigates the impact of managerial ability and auditor report readability on the cost of debt and corporate liquidity in Omani-listed industrial companies.

Design/methodology/approach: The study uses data from the S&P Capital IQ database and audited annual reports published on Muscat Securities Market. The sample consists of 35 firms (175 firm-year observations) from 2015 to 2019. Managerial ability is measured using the data envelopment analysis proposed by Demerjian et al. (2012a, b). Auditor report readability is measured as a log of the auditor report digital file size proposed by Loughran and McDonald (2014).

Findings: This study finds that a company's managerial ability reduces the cost of debt lending support to upper echelons and agency theory. Highly able managers of industrial companies are associated with increased corporate liquidity consistent with the precautionary motive of holding cash. In addition, less-readable auditor reports contribute to higher debt costs and reduce corporate liquidity.

Originality/value: To the best of the authors’ knowledge, few studies have explored the influence of managerial ability and auditor reporting readability on firms' financial policy. For industrial-sector firms, this study demonstrates the managerial ability and readability of auditor readability as significant determinants of the cost of debt and corporate liquidity, especially during periods of uncertainty. Thus, the findings can be generalized to other non-financial sector firms in the country and the Middle East.

Item Type:	Journal article
Publication Title:	Asian Review of Accounting
Creators:	Dalwai, T., Habib, A.M., Mohammadi, S.S. and Hussainey, K.
Publisher:	Emerald
Date:	15 June 2023
Volume:	31
Number:	3
ISSN:	1321-7348
Identifiers:	Number Type 10.1108/ara-06-2022-0151 DOI 1879031 Other
Divisions:	Schools > Nottingham Business School
Record created by:	Jonathan Gallacher
Date Added:	26 Mar 2024 15:52
Last Modified:	26 Mar 2024 15:52
URI:	https://irep.ntu.ac.uk/id/eprint/51161

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