Impact of Capital Structure on Firm Value and Profitability with the Moderation of Audit Quality: Evidence from N-11 Countries

Abstract

Purpose: This study examines whether audit quality moderates the relationship between capital structure and two firm outcomes, market-based firm value (FV) and accounting-based profitability (Return on Equity, ROE), across the Next-Eleven (N-11) emerging economies, addressing the limited evidence on how financing decisions translate into value and profitability outside developed capital markets.

Methodology/Design/Approach: Using a panel of 3,124 firms (31,240 firm-year observations) drawn from Thomson Reuters Datastream over 2014–2024, the study estimates four complementary specifications: pooled OLS, cross-sectional GMM, firm fixed-effects with cluster-robust standard errors, and a static panel GMM estimator built on a within-firm de-meaning transformation.

Findings: Multicollinearity is negligible across all specifications (mean VIF = 1.07). Capital structure, audit quality, and their interaction are statistically insignificant under pooled OLS, cross-sectional GMM, and cluster-robust fixed-effects estimation. However, once time-invariant firm heterogeneity is purged via de-meaning and the model is estimated by static panel GMM, capital structure emerges as positive and significant for both firm value and ROE, while the moderating role of audit quality remains unsupported in every specification. Firm size is negative and significant throughout.

Practical Implications: Managers, auditors, and regulators in N-11 markets should not rely on conventional pooled or cluster-robust estimates alone when assessing the leverage–value relationship, since a genuine, if modest, positive effect can be masked by the choice of estimator; policymakers seeking to strengthen the certifying role of external audit in these markets may need to look beyond auditor identity alone.

Originality/Value: This is among the first studies to jointly test capital structure, audit quality, and their interaction for both a market-based and an accounting-based outcome across the full N-11 grouping, and to benchmark cluster-robust fixed-effects inference explicitly against static panel GMM inference on the same de-meaned specification.

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