The Effect of Audit Quality on the Relationship between Agency Costs and Investment Efficiency

An Empirical Study on Non-Financial Companies Listed in Kuwait Exchange Securities

Abstract

This study aimed to examine the impact of agency costs on investment efficiency of non-financial companies listed on the Kuwait Stock Exchange securities, and to examine the moderating effect of audit quality in this relationship. To achieve this objective, secondary data was collected from the annual financial reports of non-financial companies listed on the Kuwait Stock Exchange. The number of study companies was 71, and the study covered seven years period from 2017 to 2023, with a total of 497 observations, and data were analyzed using E-views 10.

Agency costs were measured using two proxies: assets turn-over and expenses ratios. Investment efficiency was measured using model of Chen et al. (2011), while audit quality was measured using Big Four audit firms.

The study results showed that agency costs measured by assets turn-over ratio, had negative impact on over-investment, while agency costs measured by expenses ratio, had positive impact on under-investment. Audit quality as moderating variable had no impact on over-investment, but had negative impact on under-investment.