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

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.

Citation

Dalwai, T., Habib, A.M., Mohammadi, S.S. and Hussainey, K. (2023), "Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?", Asian Review of Accounting, Vol. 31 No. 3, pp. 437-459. https://doi.org/10.1108/ARA-06-2022-0151