Investment deviation from the optimal path: does the examination of audit quality services matter? A French study

Abstract

Purpose The study of the relationship between external auditing services and investment deviation in a French setting has received relatively little research attention thus far. There are insufficient indicators to measure audit quality and then have a measurable link to investment efficiency. This study is motivated by such a research gap as well as the important role of auditing services in assuring investment efficiency. The purpose of this study is to test whether a good audit quality service improves corporate investment awareness in French-listed companies and contributes to establishing a comprehensive analysis framework for inefficient investment and how audit services have become an important tool to reduce the investment deviation of listed companies in France. Design/methodology/approach Based on a sample of 89 non-financial French firms listed on the Stoxx 600 Index from 2015 to 2021, this study uses feasible generalised least squares (FGLS) regressions to study the relationship between investment deviation and auditing service quality. Findings After running an FGLS regression model for two firm groups (overinvestment and overinvestment groups) and testing for a set of control variables, especially COVID-19, the findings show a non-linear correlation between audit service and corporate investment deviation. Both underinvestment and overinvestment decisions are negatively and statistically significantly impacted by audit indicators. Furthermore, involving a high-quality specialised auditor may enhance overall monitoring and lead to a lower investment deviation level. Overall, the empirical results show that a high-quality audit service enhances the investment efficiency of French-indexed companies. Practical implications This study offers crucial information that audit regulators can use to better appreciate the advantages of high audit quality and to take seriously the policy issues that affect it. Board members are urged to provide excellent audit quality that improves investment efficiency with careful consideration. Originality/value This study contributes to the existing audit literature by illuminating the effect of audit quality services on investment deviation to show a deeper understanding of the factors that contribute to the differences in prior studies’ findings in the field of audit quality impacts.