University of Isfahan Journal of Asset Management and Financing 2383-1189 13 4 2025 12 22 The Impact of Audit Quality on Organizational Capital and Financing Capacity The Impact of Audit Quality on Organizational Capital and Financing Capacity 97 116 29487 10.22108/amf.2025.142982.1928 FA Somaye Fathi Ph.D. Candidate, Department of Accounting, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran 0009-0006-1971-7812 Mahdi Bahar Moghadam Associate Professor, Department of Accounting, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran 0000-0002-6449-4092 Kazem Shamsadini Associate Professor, Department of Accounting, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran 0009-0006-1971-7812 Journal Article 2024 10 16 While audit quality remains one of the most widely examined topics in auditing research, its influence on corporate investment behavior and financing decisions remains underexplored. This study examines the dual impact of audit quality on organizational capital and financing capacity using data from 148 Tehran Stock Exchange (TSE) listed firms (2011-2022). Employing audit fees as an audit quality proxy within an Analytical Hierarchy Process (AHP) framework, we find audit quality significantly enhances organizational capital, suggesting high-quality audits facilitate strategic resource allocation and capital formation. Conversely, we document an inverse relationship between audit quality and financing capacity, revealing a dynamic interaction where rigorous auditing may initially constrain but ultimately strengthen firms' financial sustainability by improving credibility and access to stable funding sources. These findings contribute to the auditing literature by demonstrating audit quality's dual role as both an enabler of organizational development and a moderator of financial constraints. Keywords: Audit Quality, Organizational Capital, Audit Quality Metrics, Financing Capacity JEL Classification: M42, O16, G32 Introduction This study examines the dual role of audit quality in fostering organizational capital development and enhancing corporate financing capacity, addressing a significant gap in the literature regarding audit quality's influence on intangible investments. While prior research has established audit quality's importance in improving financial reporting transparency and reducing information asymmetry (DeFond & Zhang, 2014), its impact on strategic organizational assets remains underexplored. Organizational capital - the synergistic combination of knowledge, human capital, and physical assets - serves as a critical driver of value creation and competitive advantage (Georgantopoulos et al., 2022). We hypothesize that high-quality audits positively influence organizational capital by facilitating strategic investments (H1) and exhibit a complex, bidirectional relationship with financing capacity (H2), particularly valuable in economically volatile environments where access to external financing proves challenging (Lim et al., 2022). By analyzing Tehran Stock Exchange-listed firms, this study provides novel insights into how audit quality serves as an institutional mechanism that simultaneously nurtures intangible assets and improves financial access, thereby contributing to both corporate finance theory and practice. The findings offer meaningful implications for regulators and firms seeking to optimize their audit investments for both organizational development and financial sustainability. Metod and data This study employs panel data analysis of 1,776 firm-year observations (148 companies) from Tehran Stock Exchange-listed firms between 2011-2022, sourced from the Codal database and the Management Research, Development, and Islamic Studies Library. Following rigorous screening of the initial 5,496 observations from 458 companies, we implemented modified versions of Georgantopoulos et al.'s (2022) econometric models to examine audit quality's dual impact on organizational capital and financing capacity. Our methodological approach incorporates (1) multivariate regression analysis to assess the hypothesized relationships, (2) robustness checks to address potential endogeneity concerns, and (3) industry-adjusted measures to control for sector-specific variations. The selected models specifically account for firm-level characteristics while controlling for macroeconomic factors prevalent in emerging market contexts. Model (1): OCit=α+β1AQit+β2SIZEit+β3DEBTit+β4TOBINQit+β5FCFit+β6NCTit+β7GROWTHit+β8ISSUEit +β9SUBSit+β10ROAit+β11IOWNit+β12BINDit+β13YEARDUMit+β14INDDUMit +€it Model (2): FCit=α+β1AQit+β2SIZEit+β3DEBTit+β4TOBINQit+β5FCFit+β6NCTit+β7GROWTHit+β8ISSUEit+β9SUBSit+β10ROAit+β11IOWNit+β12BINDit+β13YEARDUMit+β14INDDUMit +€it Our measurement approach operationalizes organizational capital (OC) following Peters and Taylor's (2017) Model (3): ORGC it =(1-y0) ORGCit-1 +(SG&Ait * ð0) where y represents the depreciation rate, SG&Ait denotes total selling, general, and administrative expenses, and δ reflects the proportion of training costs to total SG&A expenses. Financing capacity (FC) is calculated as the annual interest expense-to-total debt payments ratio. To address audit quality measurement complexities, we employed the Analytical Hierarchy Process (AHP), administering a pairwise comparison matrix to 15 auditing scholars and practitioners. The consistency evaluation (consistency ratio < 0.1) identified audit fees (AQ_AF) as the optimal proxy, given its superior weighting score (0.72) across relevance, reliability, and data availability criteria. Findings Our empirical results support the first hypothesis, revealing a statistically significant positive relationship between audit quality and organizational capital (β = 0.04, p < 0.01), suggesting that each unit increase in audit fees corresponds to a 0.04-unit increase in organizational capital. This finding aligns with the theoretical expectation that high-quality audits contribute to knowledge accumulation and strategic decision-making enhancement through rigorous verification processes. Regarding the second hypothesis, we observe a significant negative association between audit quality and financing capacity (β = -0.12, p < 0.05), supporting the substitution effect hypothesis where firms facing financial constraints demand higher audit quality to compensate for increased information asymmetry. The results suggest an inverse dynamic equilibrium where improved financing capacity reduces the marginal benefit of audit quality, consistent with agency cost theory predictions. These findings collectively demonstrate audit quality's dual role as both an organizational capital enhancer and a financial constraint mitigator. Discussion and Conclusion This study reveals two key findings regarding audit quality's dual role: first, audit fees (as an audit quality proxy) exhibit a significant positive relationship with organizational capital (β=0.42, p<0.01), supporting the proposition that high-quality audits facilitate knowledge transfer and strategic investment in intangible assets, consistent with Georgantopoulos et al.'s (2022) findings. Second, we identify a significant negative association between audit quality and financing capacity (β=-0.31, p<0.05), confirming that firms facing financial constraints demand higher audit quality to mitigate information asymmetry and improve resource access, aligning with McNelly et al. (2019) and AlaviTabari and Hashemiyan (2011). These results collectively advance our understanding of audit quality's dual function as both an organizational capital enhancer and financial constraint moderator. The study contributes to the literature by empirically validating these relationships in an emerging market context, while suggesting future research avenues to examine audit quality's impact on other intangible assets like human capital within this framework. While audit quality remains one of the most widely examined topics in auditing research, its influence on corporate investment behavior and financing decisions remains underexplored. This study examines the dual impact of audit quality on organizational capital and financing capacity using data from 148 Tehran Stock Exchange (TSE) listed firms (2011-2022). Employing audit fees as an audit quality proxy within an Analytical Hierarchy Process (AHP) framework, we find audit quality significantly enhances organizational capital, suggesting high-quality audits facilitate strategic resource allocation and capital formation. Conversely, we document an inverse relationship between audit quality and financing capacity, revealing a dynamic interaction where rigorous auditing may initially constrain but ultimately strengthen firms' financial sustainability by improving credibility and access to stable funding sources. These findings contribute to the auditing literature by demonstrating audit quality's dual role as both an enabler of organizational development and a moderator of financial constraints. Keywords: Audit Quality, Organizational Capital, Audit Quality Metrics, Financing Capacity JEL Classification: M42, O16, G32 Introduction This study examines the dual role of audit quality in fostering organizational capital development and enhancing corporate financing capacity, addressing a significant gap in the literature regarding audit quality's influence on intangible investments. While prior research has established audit quality's importance in improving financial reporting transparency and reducing information asymmetry (DeFond & Zhang, 2014), its impact on strategic organizational assets remains underexplored. Organizational capital - the synergistic combination of knowledge, human capital, and physical assets - serves as a critical driver of value creation and competitive advantage (Georgantopoulos et al., 2022). We hypothesize that high-quality audits positively influence organizational capital by facilitating strategic investments (H1) and exhibit a complex, bidirectional relationship with financing capacity (H2), particularly valuable in economically volatile environments where access to external financing proves challenging (Lim et al., 2022). By analyzing Tehran Stock Exchange-listed firms, this study provides novel insights into how audit quality serves as an institutional mechanism that simultaneously nurtures intangible assets and improves financial access, thereby contributing to both corporate finance theory and practice. The findings offer meaningful implications for regulators and firms seeking to optimize their audit investments for both organizational development and financial sustainability. Metod and data This study employs panel data analysis of 1,776 firm-year observations (148 companies) from Tehran Stock Exchange-listed firms between 2011-2022, sourced from the Codal database and the Management Research, Development, and Islamic Studies Library. Following rigorous screening of the initial 5,496 observations from 458 companies, we implemented modified versions of Georgantopoulos et al.'s (2022) econometric models to examine audit quality's dual impact on organizational capital and financing capacity. Our methodological approach incorporates (1) multivariate regression analysis to assess the hypothesized relationships, (2) robustness checks to address potential endogeneity concerns, and (3) industry-adjusted measures to control for sector-specific variations. The selected models specifically account for firm-level characteristics while controlling for macroeconomic factors prevalent in emerging market contexts. Model (1): OCit=α+β1AQit+β2SIZEit+β3DEBTit+β4TOBINQit+β5FCFit+β6NCTit+β7GROWTHit+β8ISSUEit +β9SUBSit+β10ROAit+β11IOWNit+β12BINDit+β13YEARDUMit+β14INDDUMit +€it Model (2): FCit=α+β1AQit+β2SIZEit+β3DEBTit+β4TOBINQit+β5FCFit+β6NCTit+β7GROWTHit+β8ISSUEit+β9SUBSit+β10ROAit+β11IOWNit+β12BINDit+β13YEARDUMit+β14INDDUMit +€it Our measurement approach operationalizes organizational capital (OC) following Peters and Taylor's (2017) Model (3): ORGC it =(1-y0) ORGCit-1 +(SG&Ait * ð0) where y represents the depreciation rate, SG&Ait denotes total selling, general, and administrative expenses, and δ reflects the proportion of training costs to total SG&A expenses. Financing capacity (FC) is calculated as the annual interest expense-to-total debt payments ratio. To address audit quality measurement complexities, we employed the Analytical Hierarchy Process (AHP), administering a pairwise comparison matrix to 15 auditing scholars and practitioners. The consistency evaluation (consistency ratio < 0.1) identified audit fees (AQ_AF) as the optimal proxy, given its superior weighting score (0.72) across relevance, reliability, and data availability criteria. Findings Our empirical results support the first hypothesis, revealing a statistically significant positive relationship between audit quality and organizational capital (β = 0.04, p < 0.01), suggesting that each unit increase in audit fees corresponds to a 0.04-unit increase in organizational capital. This finding aligns with the theoretical expectation that high-quality audits contribute to knowledge accumulation and strategic decision-making enhancement through rigorous verification processes. Regarding the second hypothesis, we observe a significant negative association between audit quality and financing capacity (β = -0.12, p < 0.05), supporting the substitution effect hypothesis where firms facing financial constraints demand higher audit quality to compensate for increased information asymmetry. The results suggest an inverse dynamic equilibrium where improved financing capacity reduces the marginal benefit of audit quality, consistent with agency cost theory predictions. These findings collectively demonstrate audit quality's dual role as both an organizational capital enhancer and a financial constraint mitigator. Discussion and Conclusion This study reveals two key findings regarding audit quality's dual role: first, audit fees (as an audit quality proxy) exhibit a significant positive relationship with organizational capital (β=0.42, p<0.01), supporting the proposition that high-quality audits facilitate knowledge transfer and strategic investment in intangible assets, consistent with Georgantopoulos et al.'s (2022) findings. Second, we identify a significant negative association between audit quality and financing capacity (β=-0.31, p<0.05), confirming that firms facing financial constraints demand higher audit quality to mitigate information asymmetry and improve resource access, aligning with McNelly et al. (2019) and AlaviTabari and Hashemiyan (2011). These results collectively advance our understanding of audit quality's dual function as both an organizational capital enhancer and financial constraint moderator. The study contributes to the literature by empirically validating these relationships in an emerging market context, while suggesting future research avenues to examine audit quality's impact on other intangible assets like human capital within this framework.

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