THE EFFECT OF AUDITOR QUALITY ON CASH HOLDINGS: EMPIRICAL EVIDENCE FROM JORDAN

Abstract

This research uses a generalized least squares (GLS) estimator and panel data analysis to analyse the association of audit quality with corporate cash-holding policies among a sample of 87 non-financial firms listed on the Amman Stock Exchange (ASE) from 2011 to 2017 in Jordan. The significance of corporate cash holdings has grown over recent years, especially since the global financial crisis (GFC) which restricted firms' access to external finance and accentuated the need for internal sources of liquidity. Our findings reveal a positive and significant relationship between audit firm size, audit fees, profitability and corporate cash holdings. These results imply that firms that are audited by larger audit firms, charge higher audit fees, and have higher profitability, tend to hold more cash. In general, the findings reveal the significance of audit quality and firm-specific financial factors in determining liquidity policies of Jordanian listed firms. Specifically, audit firm size and audit fees appear to play a central role in improving financial discipline and facilitating firms' cash management policies. The results highlight the role of audit quality-related characteristics in enhancing financial decision making in Jordan.