CHAPTER I

THE PROBLEM

Introduction

Financial institutions in the Philippines are currently navigating a landscape

fraught with numerous economic and financial challenges. One of the primary issues is

the rising cost of capital, which has significant implications for their operations and

profitability. High inflation rates, driven by factors such as global supply chain

disruptions and increased commodity prices, have eroded the purchasing power of

money. This, in turn, prompts central banks to hike interest rates to tame inflation, which

unfortunately leads to higher borrowing costs for banks and other financial institutions.

Additionally, stringent regulatory requirements and the need for greater capital reserves

to cushion against financial shocks add further pressure. As these institutions strive to

maintain profitability, they are forced to manage the delicate balance between attracting

deposits and lending at sustainable rates, all while ensuring compliance with regulatory

norms and mitigating risks associated with fluctuating global markets.

This challenging scenario is reflected in the recent decision by the Bangko Sentral

ng Pilipinas (BSP) to keep its key policy rate at 6.5 percent, a rate unchanged since the

off-cycle hike in October 2023. This decision, marking the fourth consecutive period of

steady rates, directly responds to the accelerated inflation observed in March 2024. The

BSP’s Monetary Board aims to control inflation by maintaining high interest rates,

theoretically discouraging borrowing and spending to slow economic growth and the rise

of prices. However, this policy also has the unintended consequence of increasing the

cost of capital for financial institutions. Elevated interest rates mean that banks face
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higher costs when sourcing funds, which can squeeze profit margins and reduce the

incentives for lending. The BSP Governor highlighted that the projected inflation path

has shifted slightly higher, with 2024’s risk-adjusted inflation now projected at 4 percent,

up from the 3.9 percent forecast in February. This shift is influenced by factors such as

higher global oil prices and unexpectedly high inflation rates in early 2024, further

complicating the financial landscape for these institutions (Yu, 2024).

In this environment, the role of audit quality becomes crucial. High-quality audits

can provide financial institutions with more accurate and reliable financial information,

enhancing their ability to make informed decisions in a volatile market. Good audit

practices ensure transparency and compliance with regulatory standards, which can

improve investor confidence and potentially lower the perceived risk of investing in these

institutions. This can help mitigate the negative effects of high costs of capital by

attracting more stable and cost-effective funding sources. Therefore, robust audit quality

can play a positive role in managing the financial challenges faced by institutions,

fostering greater financial stability and resilience amidst economic pressures.

Statement of the Problem

The objective of this study was to investigate the influence of audit quality on the

costs of capital of financial institutions listed on the Philippine Stock Exchange.

Specifically, it sought answers to the following questions:

1. How may the costs of capital of the financial institutions be assessed in terms of:

1.1. Cost of Debt

1.2. Cost of Equity; and

1.3. Weighted Average Cost of Capital (WACC)?

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2. How may the level of audit quality of financial institutions be described in terms of:

2.1. Audit firm specialization;

2.2. Audit fees; and

2.3. Audit firm size?

3. Does the audit quality significantly affect the costs of capital within financial

institutions?

4. Based on the result, what information, education, and communication materials could

be put forward?

Hypothesis of the Study

The study tested the following hypothesis:

Ho: The audit quality has no significant effect on the cost of capital within financial

institutions.

Scope, Delimitation, and Limitation of the Study

This study was conducted to assess the impact of audit quality on the costs of

capital of financial institutions listed in the Philippine Stock Exchange (PSE). The

variables that were considered are how can costs of capital be assessed by the measures

considered such as cost of debt, cost of equity, and the weighted average cost of capital.

As well as how the level of audit quality can be described within the financial institutions

in terms of audit firm specialization, audit fees, and audit firm size as measures. Based on

the results of the study, information, education, and communication material are

proposed.

In addition to that, the conduct of this study is significant to determine how the

costs of capital can be managed within financial institutions. Also, to distinguish how the
 4

level of their audit quality improves the trust and confidence of stakeholders and aids

them when making decisions. To achieve the objective of this study, the researchers first

gathered the list of financial institutions as per the PSE website and identified which

financial institution has available data necessary for the variables and measures of the

study. Through the relevant data collected, further analysis will be made in order to

provide appropriate interpretation.

Moreover, it is delimited to the 14 excluded financial institutions, out of the total

population of 30 financial institutions listed in the PSE website, due to the listing date

and incomplete data available on their websites as well as those companies listed in the

Philippine Stock Exchange that are not considered financial institutions. On the other

hand, this study is limited to the 16 financial institutions listed in the PSE, which upon

sorting, has the complete and necessary audited financial statements, SEC Form 17 - A,

and annual reports for the years 2013 to 2022 available on their websites.

Significance of the Study

This research will be beneficial to several stakeholders. Firstly, financial

institutions will benefit from assessing the impact of audit quality on the costs of capital

within their operations. It will assist them in making better investment decisions

considering the better type of financing to utilize which will benefit them in the long run

and to aid them in achieving their goals and objectives. It will provide them with an

overview of how audit quality can be utilized more effectively to their benefit rather than

just for compliance and reputation in the industry.

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Secondly, the management can implement appropriate measures to enhance audit

quality, consequently improving and reducing the costs of capital without compromising

the operations and investments. This will allow them to devise plans and make decisions

which will streamline their operations which can strengthen their position in the industry

as compared to competitors. Also, this will aid in making more productive and

worthwhile investments.

Also, auditors can utilize the insights gained to evaluate the financial statements,

operations, and compliance of financial institutions with relevant standards and criteria. It

will aid them in being able to provide a higher quality of audit to their clients. This will

enable them to gather more information about how financial institutions probably manage

their operations aiming to control their costs of capital.

For investors and debtholders, this study will provide insights on the possible

effects of audit quality on their investments and on the loans made to them by the

financial institutions. This will allow them to have an overview of the fluctuations with

regards to their expected returns due to various factors. Also, this will aid in assessing

financial institutions before investing in or lending to them.

Finally, future researchers will find the results of this study beneficial as it can

serve as a basis for future research on financial institutions. It can substantiate their study

whether it be investigating the same variables or topic. This can aid them in tackling

other related research gaps with regards to the financial industry.

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 CHAPTER II

REVIEW OF LITERATURE

Conceptual Literature

The conceptual literature provides valuable insights on topics relevant to this

study, aligning with the researchers' objectives and serving as a foundation for the next

discussion.

Cost of Capital

In capital planning, the cost of capital (COC) is the lowest return needed to justify

initiating a project. Analysts in finance and companies use the cost of capital to evaluate

the quality of investments. If the return on an investment is higher than the cost of capital,

the company's balance sheets will eventually gain value from it. However, if the returns

on an investment are less than or equal to the cost of capital, it indicates that the funds are

not being used wisely. Investors are likely to find an organization with a costly source of

capital less appealing because they can expect fewer profits over the long run (Hayes,

2024).

Saalmuller (2022) mentioned that a company's accounting department computes

the costs of capital to evaluate an investment's profitability and risk to finance. It is used

by business executives to calculate the amount of new projects needed to generate in

order to pay for their initial expenses and make a profit. They also use it to evaluate the

potential risk of future business decisions. Regular cost of capital assessment aids

investors and business executives in making informed financial decisions in a timely

manner. When calculating the cost of capital, shareholders, accountants, and managers

must consider three factors: the weighted average cost of capital, the cost of debt, and the
 8

cost of equity. The cost of capital is derived from the economic theory of

substitution. If a similar asset is more appealing when risk is taken into consideration, a

potential buyer will not buy it. This suggests that an investor will buy the asset that

provides the least amount of risk at a specific return level or the best return at a given risk

level. This presupposes that risk and reward have a positive relationship (Callahan &

Mauboussin, 2023).

As stated by Kim (2024), the cost of capital calculates the expected rate of return

given the risk profile of an investment. The indicated return is considered adequate

considering the risk associated with an investment, and the cost of capital presents as the

opportunity cost to investors, including debt lenders and equity stockholders. Whether a

company is being funded by equity or debt; and the goal is to provide an adequate

amount of return to offset the potential risk of providing the funding.

In accordance with Finserv (2024), the cost of debt is crucial to business because

it directly affects profit, and the decisions made about spending on capital and expansion

plans. The current interest rate environment, market dynamics, investment risk, and the

stability of the company's finances are some of the variables that affect the cost of capital.

Businesses must comprehend and manage the cost of capital properly to guarantee

sustainable growth and an ideal capital structure.

Cost of Debt

The cost of debt, as defined by Kim (2024), is the minimum return debt holders

require to finance a borrower's debt, determined by market-observable interest rates on

loans and bonds. It rises if the borrower's credit worsens but decreases if company

fundamentals improve, such as higher profits or cash flows. Similarly, Hayes (2024)
 9

describes the cost of debt as the business's effective rate of interest on bonds and loans,

calculated by averaging interest on all debts. Higher costs reflect greater risk as they

depend

on the borrower's creditworthiness.

Furthermore, the return on debt capital is commonly expressed as Kd. Since

interest is tax deductible, the cost of debt should be taxed at the marginal tax rate. The

capital structure demonstrates the amount of debt and equity a business employs to fund

its activities and expansion. Moreover, analysts compute the cost of debt as part of a

target company's weighted average cost of capital. This represents the return that all

capital providers need to cover the risk associated with the underlying assets (Riley,

2020).

Finschool (2024) stated some of the aspects that influence the cost of debt,

including the creditworthiness of the borrower, interest rate environment, type and term

of debt, market conditions, collateral and security, debt ratings, tax consideration,

economic and political stability, lender relationship and market competition, and industry

and sector. The higher interest rates, unfavorable market conditions, and sectors dealing

with regulatory uncertainty or economic difficulties normally translate into higher costs

of debt for borrowers. While stronger creditworthiness, collateralized loans, tax benefit,

higher credit ratings, competitive bidding, established partnerships, and stable economic

conditions usually translate into lower interest rates, indicating lower perceived risk to

lenders.

Finally, for companies that depend on debt financing to fulfill their financial

commitments, knowing the cost of debt formula is crucial. Businesses can make well-
 10

informed judgments about taking on new debt or refinancing current commitments by

knowing ways to improve cost of debt such as improving credit rating, reducing interest

expense, and taking advantage of tax savings by reducing interest expense. Businesses

can evaluate their overall financial health and make strategic capital structure decisions

by precisely measuring the cost of debt (United Capital Source, 2023).

Cost of Equity

The cost of equity is the return that investors anticipate at the risk of participating

in a business or project. Also called the hurdle rate, it reflects the minimum return

investors seek, which varies with risk levels. Equity represents the residual value of

assets after liabilities. The COE is crucial for stock valuation, helping determine

investment worth. Investors aim for returns at least equal to the cost of equity, while

businesses benefit from maintaining an attractive rate to attract investors. Generally,

higher risks lead to a higher cost of equity (Indeed, 2023).

According to the Vipond (2024), the cost of equity is the anticipated return that is

necessary for investors to offset the risk of owning stock in a business. Unlike debt,

where payments are fixed, the COE is based on the risk that the business faces and

growth potential. Generally, it is more expensive than debt since investors often view

debt as less risky because it has fixed rates of interest and a priority claim on assets in the

event of bankruptcy. Equity investors, on the other hand, are at more risk because they

only have residual rights on assets and their rewards are based on the company's success.

The cost of equity is a key financial concept that represents the "price" a company

must pay to attract investment capital, considering factors such as risk, opportunity, and

market conditions. It quantifies the return shareholders expect based on the perceived risk
 11

by purchasing stock in a corporation. This metric is essential for capital planning and

investment choices, so companies need to assess if the anticipated returns from new

projects exceed the cost of equity to meet investor expectations. The present value of

future profits and the company’s market valuation is decreased by a greater discount rate

brought on by a higher cost of equity, while a lower cost enhances valuation.

Additionally, evaluating a business's cost of equity in relation to its rivals offers insights

into how investors perceive its relative risk, with a higher cost indicating greater

perceived risk or inefficiency in the market (Harshinidevi, 2024).

According to Villanova and Artuto (2024), the cost of equity is the lowest return a

business may obtain on capital-funded investments in order to preserve its share value,

effectively representing the market's required return for investing in that company. If, for

example, the equity has a 10 percent cost, the business must meet shareholder

expectations by generating a return on equity investments of at least 10 percent .This

metric is important for making financial decisions, particularly when assessing new

initiatives. If a project generates value for shareholders and its anticipated return is

greater than the cost of equity, it is considered financially viable. The cost of equity,

which is determined by multiplying the market risk premium by the beta of equity and

adding the risk-free rate, shows the return that shareholders require depending on risk. A

higher cost suggests a need for a greater return, often leading firms to favor debt

financing, while a lower cost may encourage broader equity financing and investment

opportunities.

The return a business must provide shareholders in exchange for the risk of

purchasing its shares is reflected in the cost of equity. This measure is crucial for guiding
 12

corporate finance decisions, serving as a benchmark for evaluating projects, determining

capital structure, and assessing performance. It is often computed using the Capital Asset

Pricing Model (CAPM), which takes into account variables such as business-specific

risk, market- risk premium, and the rate free of risk. Companies use this metric to decide

if projects create shareholder value, balance debt and equity, and support valuation

models for informed strategic choices (Lino, 2024).

Weighted Average Cost of Capital

In accordance with Jadeja (2024), the Weighted Average Cost of Capital (WACC)

is a financial metric which evaluates the overall financing costs by proportionally

weighting its equity and debt components within its capital structure. Corporate

executives utilize WACC to guide decisions regarding funding for operations, while

investors know what minimum rate of return to expect from their investments. It provides

management with a comprehensive perspective on the company's cost of borrowing and

helps evaluate required returns with regards to new ventures. Investors use weighted

average cost of capital to assess whether investing in or lending money to a company is

viable. A higher WACC indicates elevated financing costs, often implying greater risk

associated with the company. Conversely, a lower WACC suggests lower financing

expenses and potentially reduced risk.

Based on Fydenkevez (2023), weighted average cost of capital is a critical

business metric that assesses the expenses in relation to acquiring funds via various

funding sources. The WACC percentage informs investors about the financial outlay a

company allocates to sustain its operations, enabling them to predict potential costs to be

incurred in the issuance of stocks or bonds. Numerous factors influence weighted average
 13

cost of capital, but generally, robust companies with steady revenue and strong earnings

tend to have lower WACC compared to weaker firms.

Moreover, weighted average cost of capital is the average cost of capital blending

the company’s debt and equity. Based on the company's capital structure, weighted

average cost of capital determines the hurdle rate for investments to evaluate potential

projects to be pursued, as they are deemed to increase firm value. It is also a key input in

several decision-making considerations like pricing capital projects, assessing targets,

and for company valuation. Thus, keeping track of the changes in WACC is beneficial for

evaluating and monitoring the shifts in the costs of capital and the related risks therein

(Poli, 2023).

According to Girardin (2023), a company’s capital structure is the combination of

both debt and equity as utilized to finance their ongoing operations. This gives

significance to the need to weight this debt and equity in weighted average cost of capital

due to the differences in their rates of return or costs. The WACC takes into account the

capital structure then compares the sources of capital which present the proportions of

debt and equity. This emphasizes that WACC is the necessary amount in order to fund

the operations.

In addition to that, the weighted average cost of capital is utilized in decision-

making and is applied to the investments of the company to ascertain the costs to be

incurred. WACC helps distinguish which investment will bring higher returns as

compared to the cost of capital. It can be utilized in capital budgeting decisions in order

to weigh different financing options. By understanding WACC, the most cost-effective

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way to raise capital for funding new projects can be determined. WACC is also treated as

a benchmark for assessing the financial performance of the business (Iggo, 2023).

As per the article by The Funding Family (2024), weighted average cost of capital

plays a huge role in terms of capital budgeting, valuation of companies, decision-making,

and even comparative analysis. It is due to the valuable insights this shows about the cost

of capital which needs proper management and allocation of resources. The cost of debt,

cost of equity, capital structure and market conditions are necessary considerations to

formulate a company’s weighted average cost of capital. Since it varies in different

industries due to risk profiles and capital structures, there is no universally accepted

threshold for a “good” weighted average cost of capital. Rather, it is compared to the

weighted average cost of capital of those within the same industries to determine whether

it is better or not.

Audit Quality

According to the article of ACCA (2024) entitled “Audit quality - IAASB’s

Framework” identified that audit quality’s essential components are inputs, processes,

outputs, important interactions within the financial reporting supply chain, and contextual

factors. It refers to a set of important components that work together to maximize the

possibility that quality audits will be conducted on a regular basis. Focus must be given to

potential problems like the existence of material misstatements in the entity, the

appropriateness of audit decisions made, and compliance to implemented standards.

The Australian Securities and Investments Commission (2024) defined audit

quality as factors that ensure auditors can provide reasonable assurance with regards to

financial reports and address any identified issues. Audit committees and directors play a
 15

key role by ensuring audits are well-resourced and financial information is high-quality.

Auditors must apply skepticism to accounting estimates, resolve deficiencies, and provide

confidence to investors and users regarding the accuracy of financial reports.

Audit quality strongly correlates with stakeholder confidence. High audit quality

in financial statements impacts stakeholders both directly and indirectly. If a company

repeatedly receives audit notes highlighting control issues, stakeholders may reconsider

their relationship with the company. Many expect a high degree of audit quality, affirmed

by auditors, along with an unqualified audit opinion. Conversely, a qualified audit report

can create issues for the management, due to its effect in both strategic and operational

decisions ranging from different areas. (Al-Qatamin & Salleh, 2020).

Several variables can impact audit quality across planning, execution, and

reporting stages, with each stage encompassing distinct quality factors. Audit plan quality

reflects adherence to rules. Audit process quality involves detecting and disclosing

material misstatements, aligned with objectives, materiality, risk, scope, and resources.

Quality in execution also requires sufficient, appropriate audit evidence and compliance

with organizational standards and regulations. For audit reports, accuracy, timeliness,

clarity, and adherence to rules are essential, as well as thoroughly substantiated

conclusions. Audit recommendations should be fair, impartial, objective, and realistic.

(Cuong & Dung, 2023).

The Canadian Public Accountancy Board article about audit quality indicators

stated that it is difficult for audit committees to quantify and assess audit quality. To

address this problem, audit quality indicators offer numerical measurements of several

external audit components. The timeliness of audit execution, the usage of specialists, the
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leverage of partners and managers, the experience of the engagement team, management

deliverables, and audit hours by regions of significant risk are common examples.

Audit firm specialization

Audit specialization involves auditors focusing their expertise on specific sectors

or industries to improve audit quality and effectiveness. Specialization can significantly

impact audit quality, performance, and planning. When selecting auditors and board

members, companies should consider auditor specialization, characteristics, and board

independence to strengthen corporate governance. Intellectual capital is also vital for

audit

quality, so companies should invest in developing and managing this resource to enhance

both audits and overall governance (Rijal & Bakri, 2023).

In the article entitled “Audit Specialization and Audit Quality: The Role of

Client’s Business Strategy”, a key factor in increasing efficiency and effectiveness is

specialization. The accumulation of specialized expertise obtained from working with

numerous clients in the same business is referred to as industrial specialization. A

specialized auditor is one who has extensive expertise and a thorough grasp of the

business and industry of their clients, is familiar with the operations of the business, and

is knowledgeable about accounting and auditing regulations that apply to a specific

industry. Due to their ability to identify mistakes and anomalies, auditor specializations

produce audits of higher quality than non-specialist auditors (Sari, 2018). An auditor with

a specialization in auditing has extensive expertise and a thorough understanding of the

business and industry of their clients, as well as specialized accounting and auditing

guidelines and understanding of client’s operations which are attributes crucial to ensure
 17

a high-quality audit. Client’s industry and kind of business affects the risk of having

material misstatements in the financial reports as well as their business risk (Agoes &

Sarwoko, 2014).

Auditors specialize in two main ways: (1) the market share approach,

distinguishing audit firms within sectors, and (2) the portfolio share approach,

differentiating firms across industries (Nana et al. 2023). Additionally, Mulyadi et al.

(2022) stated that the competence or skill that members of the audit industry possess and

have trained to enhance their capacity to provide audit services is known as the auditor

industry specialization. Having the capacity for and knowledge of the industry including

the auditor's proficiency. To ensure higher-quality audit outcomes, the auditor will

operate more productively and effectively and be assured as a result of the knowledge,

skill, and expertise of the inspector. Hence, the financial statements' integrity will be

achieved.

Audit fees

Audit fees is the expenses that companies incur when they hire public accounting

firms to examine and verify their financial statements. In everyday business operations,

these fees can sometimes pose a challenge for auditors who need to maintain their

independence while conducting their work. There is a common belief that the higher the

audit fees received from a client, the less independent the auditor becomes. This concern

arises from the perception that significant payments might influence the auditor’s

objectivity. Therefore, it is essential to address and clarify this opinion by emphasizing

the importance of auditors' commitment to their work and their professional standards.
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Auditors must demonstrate that despite the fees, their evaluations remain unbiased and

grounded in strict adherence to ethical guidelines (Binus University, 2019).

The Harvard Law School Forum on Corporate Governance (2022) discussed audit

fees as charges paid by companies for external audit services, noting that these fees have

increased due to factors such as greater regulatory complexity, stricter auditing standards,

and the need for specialized resources. Larger audit costs are frequently associated with

higher-quality audits, as auditors are better equipped to manage risk and compliance. The

article also mentions a slight decline in audit fees from 2019 to 2020, primarily due to

cost-cutting measures during the COVID-19 pandemic. However, the rise in remote

auditing challenges and increased financial reporting complexity led to greater demand

for audit services, helping to offset this decline. Regulatory pressure and evolving audit

complexities

further shaped these trends.

All payments made for services rendered during an audit of a company's financial

records are included in the audit fee. This covers the costs associated with filing reports

on directors' compensation for publicly traded corporations, as mandated by law. It also

covers fees for tasks necessary to fulfill the auditor's legal and auditing standards

responsibilities concerning materials supporting the accounts, like the strategy report, the

board's report, and any governance-related declarations. The yearly accounts, which

include both individual and, if appropriate, group accounts, are included in the specified

audit fee for parent businesses. Since the charge for auditing the parent company's

accounts is part of the overall cost for the audit of the yearly accounts, there is no need to

report it separately (Lacey, 2022).

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An audit fee is the payment, either monetary or otherwise, provided to the auditor

by the client to secure their services. Typically, before the audit begins, both the client

and auditor agree on the fee through mutual negotiation. A higher audit fee often

motivates the auditor to work more diligently, leading to improved performance and a

higher quality audit. Many companies, especially in sectors such as electricity, transport,

and facilities, typically incur greater expenses to ensure the production of quality audit

reports, thereby enhancing the credibility of their financial statements (Nurbaiti &

Setyawan, 2023).

Audit fees have been steadily increasing due to several factors identified in a

Financial Education and Research Foundation survey. Over half of CFOs attributed the

rise to new Critical Audit Matters (CAMs) and updated accounting standards, while

others pointed to challenges related to acquisitions and revenue recognition.

Organizations must evaluate new regulations to determine their applicability, and even if

a rule does not apply, they must produce documentation justifying this conclusion.

Auditors, in turn, must dedicate significant time to reviewing these materials. Similarly,

in 2014, Philippine banks experienced heightened audit demands following the Bangko

Sentral ng Pilipinas' (BSP) implementation of Basel III guidelines. This framework,

designed to enhance risk management and ensure sufficient capital adequacy, required

rigorous audits of risk assessments, capital buffers, and liquidity coverage ratios,

increasing both audit complexity and associated fees (Supervizor, 2022).

Audit firm size

Audit firm size refers to the type of audit firm that performs the audit function for

a company. These audit firms can either be international, those with affiliations with the
 20

Big Four audit firms, or local, those excluded from the Big Four audit firms. It is said that

companies choosing audit firms can be seen as a disclosure strategy since it allows the

companies to gauge the amount of disclosure to be given based on the size of the audit

firm. Large audit firms are equipped with more human and financial resources allowing

them to have the best individuals when it comes to identifying and correcting errors or

misstatements. Aside from that, because of its size and influence, they can promote an

enriched ethical culture within the firms which will produce better professionals who

work together harmoniously. In the context of revenues, these firms are expected to have

higher revenues making them capable of conducting and spending more on staff training

which will be beneficial to their growth and development as auditors (Omeiza et al.

2021).

According to Umah (2022), audit firm size entails having a different number of

auditors, specialization and services provided distinguishing one audit firm from another.

The distinction between local and large international audit firms has a significant

influence on the decision-making since large international audit firms which are usually

linked to the Big Four firms tend to be more independent because of the scale of their

operations. As large international audit firms tend to protect the reputation and integrity

they have built through the years, it is expected that they will produce high-quality audits.

On the other hand, as for local audit firms, the revenue they will be receiving from a

particular engagement may constitute a larger percentage of their total revenues. Hence,

they lean into providing more personalized services and are expected to follow

management’s requirements.
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Moreover, Suseno and Nofianti (2018) highlighted that, in the context of highly

competitive competition, large public audit firms are perceived to have more experience

and client-specific processes, making them more closely associated with high audit

quality. Their reputation and resources drive them to conduct accurate audits, as

inaccuracies could damage their credibility. Larger firms have more capital, allowing

them to invest in technology, research, and skilled professionals, and they often have

better access to comprehensive client data, enhancing their ability to detect

misstatements.

In addition to that, Salman and Setyaningrum (2023) reiterated that audit firm size

affects audit quality as they do not depend on the clients. Larger audit firms are more

likely to act professionally and do the audit with professional skepticism than smaller

ones. Also, they were able to pressure the clients to avoid doing substandard reporting

which can result in better disclosures that can aid the conduct of the audit for the

company. There was also a distinction of larger audit firms being part or affiliated with

the Big Four firms while those that are smaller audit firms are considered the local ones.

Audit firm size influences audit fees, as larger firms, with greater resources, can

conduct thorough audit procedures, enhancing audit quality. This leads to two advantages

for larger firms: collateral strength and mutual monitoring. Strong collateral enables large

firms to resist client pressure and avoid tolerating significant misstatements, protecting

their reputation and securing their industry position. Their resources also support auditor

training, testing, and high-quality audits. Additionally, firm size, reflecting auditor

experience, positively impacts audit quality through specialization and expertise (Jafari,

2015).
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Financial Institutions listed in the Philippine Stock Exchange

Financial institutions refer to companies engaged in dealing with finance and

other monetary transactions which range from loans, deposits, investments, and currency

exchange. These institutions offer a variety of services for individual and commercial

clients in the financial sector, such as banks, insurance companies, brokerage firms, and

investment dealers. They are crucial for a country’s economy since they usually become

intermediaries between entities that need funds and those that are willing to lend or invest

(Hayes, 2024).

A financial institution operates in the current financial services industry to offer a

broad range of investment, lending, and deposit options to individuals, businesses, or

both. The main types of financial institutions are retail and commercial banks, central

banks, credit unions, investment banks and corporations, savings and loan (S&L)

associations, brokerage houses, mortgage companies, and insurance companies (Horton,

2023). Similarly, Aggarwal (2024) defined financial institutions as businesses that offer

their customers financial services. It facilitates stable finances and economic prosperity

by acting as an intermediary for savers and borrowers, encouraging saves, and guiding

them in the direction of profitable endeavors. The foundation of any strong economy is

its financial institutions. The recovery and prosperity of the economy depend on these

institutions. Through the central bank, insurance regulators, investment banks, pension

fund regulators, and others, the government keeps an eye on these organizations. They

once offered standard banking services, but these days they are essential in the expansion

and development of the economy.

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The ownership of financial assets, which has existed since ancient times, is the

cornerstone of all banking, though it has since evolved far beyond the days of hoarding

gold coins for affluent clients. Although there may occasionally be an early withdrawal

charge, banks accept deposits from individuals or businesses with the understanding that

the money may be withdrawn anytime the depositor chooses. Additionally, interest on the

depositor's money may be paid by the bank. The bank then loans its available cash to

other individuals and businesses in return for payments for interest from the debtor. The

gap between the higher interest rate that banks charge borrowers and the interest rate that

they pay depositors for utilizing their money is advantageous to banks (Hall, 2023).

Furthermore, Hemming (2024) stated that the world's financial institutions come in a

wide variety. Every one of them provides customers with a distinct range of goods and

services. Retail and commercial banks, savings and loan associations, investment banks,

brokerage firms, central banks, insurance businesses, credit unions, mortgage companies,

and online banks are all included. The kind of services you require, fees and interest

rates, location, needs, and reputation are additional aspects to take into account when

selecting a financial institution. Selecting a financial institution is a significant decision.

Before making the final choice, make sure to take into account every one of the

previously mentioned considerations.

Research Literature

This section presents ideas, completed theses, conclusions, methodologies, and

other relevant information. This helps provide insights and background related to the

current study.
 24

The goal of the study of Coffie et al. (2018) was to investigate how audit quality

affects Ghana's cost of capital. Both non-listed businesses from the Ghana Club 100

database and non-financial businesses listed on the Ghana Stock Exchange (GSE) were

included in their sample. The annual series spanned a sample of forty enterprises across

the 2008–2013 six-year period. The association between audit quality and the cost of

capital was established by the study using the positivist research paradigm. In conclusion,

data points to the quality of external auditors as a potential explanation for the cost of

debt and the total cost of capital for Ghanaian businesses. The findings also demonstrated

that a low cost of debt is related to the board's size. All the components of the total cost

of capital, including cost of debt, cost of equity, and weighted average cost of capital, had

a negative link with audit quality. This lent credibility to the hypothesis of lending

credibility, which holds that a high-quality audit increases the trustworthiness of financial

reporting and lowers capital costs. There was a significant correlation between audit

quality and the cost of debt, but not with the cost of equity.

Based on the Kordlouie et al. (2018) study, which examined how earnings quality

and audit quality impact capital costs among Tehran Stock Exchange companies during a

period of sanctions, findings indicated that higher audit quality, as assessed by the size of

the audit firm and the continuity of its cooperation with the company, correlated inversely

and significantly with capital costs. It implied that better audit quality reduced capital

costs. Additionally, increasing earnings quality was associated with decreased capital

costs. The study concluded that earnings quality plays a pivotal role in influencing capital

costs for companies, highlighting its significant impact despite economic sanctions

imposed in
 25

2010 having no effect on capital costs.

Borja (2015) examined how auditor choice (proxied by audit firm size and

changes) and auditor tenure (proxied by firm tenure and partner rotation) affects the

equity cost of capital for Philippine-listed companies. The study analyzed audited

financial statements (AFS) from 2004 to 2011, including periods before and after the

implementation of Securities Regulation Code Rule 68.1 (2005), which requires an

unqualified audit opinion for compliance. The research focused on three sectors which

are the financial institutions, property, and energy and utilities, selected for their varying

regulatory environments, with financial institutions subject to stricter oversight by the

Bangko Sentral ng Pilipinas. Out of 474 firm-year observations, 166 were excluded due

to net losses or incomplete data, leaving 308 observations from 56 companies. The

findings revealed that both growth opportunities and size of the firm significantly reduced

equity costs, while leverage increased them, consistent with prior studies. Audit quality

variables also played a role: audit firm size and tenure were significant, indicating that

larger firms and longer auditor-client relationships reduce information risk. Companies

audited by top firms had lower equity costs, reflecting these auditors perceived superior

skills and experience.

The study by Eskandari et al. (2014) critically reviews the body of empirical

research examining how audit quality influences the cost of debt capital. It highlights

how high audit quality can reduce information gaps by overseeing the actions of

management, curbing managers' self-serving behavior and enhancing the reliability of

firms' informational processes. Existing studies highlight that external audit factors, such

as the size of the auditor, audit fees, non-audit services, and specialization in particular
 26

industries, play a crucial role in improving firm performance and reduced information

asymmetry. A key advantage identified is the reduction in the cost of debt capital for

businesses. Both theoretical and empirical findings suggest that audits conducted by

external auditors lower firm risk and information asymmetry, which in turn reduces the

cost of debt capital, ultimately resulting in a lower cost of debt capital.

Nana et al. (2023) explored the potential influence of an audit firm's industry

expertise on the costs associated with business debt financing. Auditors with industry

expertise were better equipped to detect and prevent questionable accounting practices

while addressing significant errors and irregularities. As a result, it is hypothesized that

audit firms specializing in certain industries reduce the cost of debt for their clients.

Therefore, the study concluded that audit firm industry expertise lowers the cost of debt

using data from Ghanaian public and unlisted enterprises. The results were in line with a

robustness test that used a different metric to gauge the audit firm's level of industry

knowledge. The paper also asserted that the effect of audit industry specialization on debt

costs is more significant for low-earning businesses compared to high-earning ones, with

no noticeable difference between private and state-owned businesses.

Gandia and Huguet (2022) investigated how audit type (voluntary or mandatory)

and audit fees influence the cost of debt, using the credence goods theory. Their study,

which focused on Spanish SMEs, found an asymmetric effect: higher audit fees were

linked to a lower cost of debt for companies that choose voluntary audits, but no

significant relationship was observed for mandatory audits. The results suggested that

while audit type and fees alone do not directly impact audit credibility, the combination

of voluntary audits and higher fees was significant for lenders, who tend to prefer higher
 27

fees in voluntary audit situations. This study emphasized the role of voluntary audits in

lowering the cost of debt when they are perceived as high-quality, providing valuable

insights for capital providers.

According to the research conducted by Le et al. (2021), which examined the

influence of audit quality and accruals quality on the cost of equity, the study found that

Vietnamese-listed companies audited by Big Four firms experience a lower cost of equity

compared to those audited by non-Big Four firms. This study, using Vietnamese listed

companies, demonstrated a significant negative association between Big 4 audits and the

cost of equity, meaning that firms audited by a Big 4 firm were perceived as less risky by

investors. The high audit quality associated with Big 4 firms enhances the perceived

reliability of financial information, which reduces investor uncertainty and lowers the

cost of equity. It supported the information quality theory over the insurance theory,

highlighted that in an emerging market like Vietnam, with limited investor protection, the

credibility of a reputable auditor played a critical role in shaping investor pricing

decisions. Additionally, the study revealed that firms with higher accruals quality also

face a lower cost of equity.

The purpose of the study of Vita et al. (2018) was to investigate and evaluate how

audit quality variables affect equity capital costs. The quality of the audit is assessed

based on the size of the public accounting firm, the auditor's industry specialization, and

the duration of the audit tenure. In the meantime, the PE Ratio was used to calculate the

cost of equity capital. All manufacturing companies that were listed on the Indonesia

Stock Exchange between 2014 and 2016 make up the study's population. Purposive

sampling was used in the sampling approach, and samples from 237 companies were
 28

collected during the observation year. The outcome demonstrated that the auditor's

industry specialization and the fluctuating size of the public accounting firm adversely

impact equity capital costs. In the meanwhile, the cost of equity capital was unaffected by

the audit tenure. The determination coefficient test revealed that the size of the public

accounting firm, the auditors' industry specialization, and the audit tenure explained 52.7

percent of the factors which influenced the cost of equity capital. The remaining 47.3

percent was attributed to other variables not included in the research model.

The article of Belkhir et al. (2021) explored how increasing bank capital,

particularly equity, influences the cost of equity. Using data from 62 countries over 26

years, the study provided strong evidence that raising equity reduces the cost of equity by

lowering bank risk. A 1 percent rise in the equity-to-assets ratio results in an 18-basis

point decrease in the cost of equity, with the effect more significant for banks with lower

initial capital, reducing costs by 79 basis points. As banks shift towards more equity and

less debt, they become less risky for investors, leading to a lower risk premium and

reduced cost of equity. This reduction in equity costs helps balance funding expenses,

allowing banks to offer more competitive loan rates, enhance credit supply, and support

economic growth. The study concluded by encouraging policymakers to reconsider

loosening capital requirements, emphasizing that the benefits of higher equity outweigh

the potential costs.

Amran et al. (2021) analyzed how company complexity and size affect audit fees

for manufacturing firms listed on the Indonesia Stock Exchange. Using secondary data

from financial statements spanning 2016 to 2018, the study employed purposeful

sampling, resulting in 36 audited financial reports from 12 manufacturing firms. The

 29

findings highlighted the role of both complexity and size in determining audit costs for

manufacturing firms. Regression analysis revealed that business complexity positively

influenced audit fees, although the effect was negligible, indicating that more complex

businesses require additional time and expertise, increasing audit costs. Conversely,

company size had a significant positive effect on audit fees, suggesting that larger firms

are more likely to hire reputable external auditors, leading to higher fees.

According to research by Park et al. (2021), the growing importance of

technological innovation in management has prompted an analysis of how auditors

respond to corporate innovation. Using data from 2000 to 2010, which integrated patent

and audit fee data, the study explored the relationship between a firm’s innovative efforts,

innovation efficiency, and audit fees. Innovative efforts were measured through R&D

intensity (R&D expenses scaled by market capitalization) and the number of patents

granted (logarithm of total patents per year). The results showed that firms with greater

R&D intensity and more patent grants face higher audit fees, as auditors associated

higher levels of innovation with increased business risks, requiring additional audit

efforts.

The research article of Cai et al. (2024) investigated the role of audit quality in

improving environmental, social, and governance issues, as well as examined the role of

media coverage represented by ESG controversy score in moderating these relationships.

An analysis of 303 Chinese companies with 2,121 observations from 2017 to 2023

suggested that while the effects of audit quality, measured by the Big 4, and audit fees on

improving ESG performance were positive, they were not significant. Additionally,

media coverage was found to act as a positive, though non-significant, moderating factor
 30

between audit quality, as measured by the Big 4, and ESG performance. However, media

coverage has a significant negative effect when audit quality is assessed based on audit

fees. The findings emphasized that higher audit fees are often linked to more detailed and

transparent audits, especially in complex areas like ESG disclosures, as they allow

auditors to allocate more resources, including time, expertise, and specialized tools, to

areas requiring more in-depth analysis.

According to the study conducted by Ajape et al. (2021) which studied the impact

of auditor industry specialization on audit quality. It was believed that auditors are able to

attract patronage as clients perceive their services to be of high quality, which aided them

to garner experience in the operations of specific clients' industries and attain the status of

'specialization’. The study examined the relationship between audit industry

specialization and audit quality in Nigeria's listed non-financial firms. Data was collected

from the financial reports of 40 listed firms over the period from 2005 to 2019, resulting

in 517 observations. Longitudinal econometric models were used for data analysis, and

the findings indicated a significant improvement in audit quality due to audit industry

specialization.

Guo et al. (2022) assessed the value of auditor industry specialization. They

employed a discrete choice model to derive the first-order demand for auditor industry

specialization which revealed that clients have a general preference for specialized

auditors. The study also found that larger clients with more complex operations has a

greater demand for industry specialization at the audit office level. By applying the

discrete choice model to the gathered data, they estimated the value of auditor industry

specialists for clients. The findings showed that the total value of industry specialization
 31

across all clients amounts to 5.2 million USD (0.36 percent of audit fees), and that

industry specialization at the firm (office) level plays a key role in auditor selection in 4

percent (6 percent) of all cases.

The study by Priyanti and Dewi (2019) examined the effects of audit rotation,

audit

tenure, and the size of both the auditing firm and the client's business on audit quality.

The study examined public companies, particularly in the telecommunications and retail

sectors, listed on the Indonesia Stock Exchange between 2012 and 2017, with a sample of

107 companies. Through multiple linear regression analysis, the study concluded that

audit tenure and audit firm size did not affect audit quality. However, audit rotation was

found to have a negative and significant impact on audit quality, while the size of the

client's company was positively associated with better audit quality.

Mali and Lim (2020) conducted a study on the possibility of audit efforts reducing

a firm's capital costs, particularly the weighted average capital cost. In this study,

additional analysis regarding audit fees, audit firm size, and investment grade firms was

done. Audit fees were deemed to be highly correlated to audit effort, which was measured

through audit hours. However, it was highlighted that audit fees were a conventional

measure of audit effort, making it an indirect cause of audit quality. For the listed firms in

Korea, the statistical methods employed were t-test, z-test, and multivariate analysis to

investigate the relationship among the variables. As per the findings, audit fees negatively

influenced the WACC though the effect of audit hours is more pronounced.

Najjarpour et al. (2017) investigated how audit fees are related to capital structure
 32

decisions in the listed companies of the Tehran Stock Exchange. The data gathered were

from the financial statements of the companies for the years 2010 to 2014. While the

research method employed is descriptive and in terms of objective criteria applied,

overall, it is beneficial to most such as the shareholders, analysts, and investors, and can

use the results. For the statistical methods used, F Learner test, Hausman test, t-test, f-

test, and modified determination coefficient. As per the findings, , the results showed that

there is an existing significant positive relationship between audit fees and capital

structure decisions.

The study of Ijaz et al. (2016) focused on examining the impact of the weighted

average cost of capital and value of a firm on a firm's investment decision. The yearly

data necessary for the variables of the food sector were taken from the Pakistan Stock

Exchange (PSE) for the years 2008 to 2014. The set of variables used in this study as

regressors were both the WACC and the value of the firm while the regress was the

investment decision. For data analysis, regression analysis, variance inflating factor, and

generalized least square method were used. The results showed that there was a negative

relationship between the weighted average cost of capital, which plays an important role

in investment decisions, and investment decisions in contrast with the value of the firm

which had a positive relationship with the firm’s investment decision.

The study by Rahman (2022) examined the relationship between profitability and

a firm's cost of funds. A sample of twelve companies listed in the Food and Allied

Industry sector of the Dhaka Stock Exchange was selected. The data from 2005 to 2019

was used to analyze whether a relationship exists between the variables. Return on Assets

(ROA) was used as the accounting measure for profitability, with WACC as the
 33

independent variable. Firm size, firm age, and firm leverage were included as control

variables. The findings revealed a negative yet significant relationship between WACC

and profitability.

In the study of Lafuerza and Mencia (2021), the cost of equity for European banks

was examined as a measure of financial resilience after the financial crisis and during

prolonged low-interest rates. The cost of equity, representing the minimum return

shareholders expect for the risks of holding bank shares, was estimated using two

methodologies: the Dividend Discount Model (DDM), which provided forward-looking

estimates ranging from 6 percent to 9 percent, and multi-factor models, which yielded a

broader range of 6 percent to 14 percent based on historical data and risk factors. These

findings highlighted the challenges banks face in achieving returns above their cost of

equity and underscore its importance as an industry benchmark for evaluating

profitability and long-term sustainability.

Theoretical Framework

This study was anchored on the study conducted by Coffie et al. (2018) entitled

“The Effects of Audit Quality on the Costs of Capital of Firms in Ghana”. This study

aimed to assess the influence of audit quality on the costs of capital in Ghana. The study's

findings revealed that audit quality is negatively correlated with all the cost of capital's

elements, including the weighted average cost of capital (WACC), the cost of debt

(COD), and the cost of equity (COE). This was consistent with the lending credibility

concept, which holds that financial reports have greater trust when audit quality is higher,

thereby reducing the overall cost of capital.

To assess the costs of capital of the financial institution, Coffie et al. (2018), the
 34

reference of this study, selected the COE, COD, and the WACC. First, the cost of equity

as defined by Kenton (2024) is the amount of money returned required by a firm to assess

whether an investment meets capital return requirements. Second, according to Hayes

(2024), cost of debt is the actual rate of interest or the entire sum of interest that a

company or individual owes on all of its commitments, such as bonds and loans. Since

the value of borrowing money depends on the borrower's financial standing, higher costs

are indicative of a riskier borrower. Lastly, as stated by Hargrave (2024) The average

after-tax cost of capital for a corporation from any source including the bonds, preferred

stock, common stock, and other debt is known as the weighted average cost of capital, or

WACC. Investors would probably want larger returns to offset their losses if a

company's debt is seen as risky or if its stock is very volatile; this will raise the

company's WACC.

Meanwhile, the study by Vita et al. (2018) was referenced to evaluate audit

quality. The purpose of this study was to investigate and evaluate the impact of audit

quality attributes, as determined by the audit tenure, the industry specialist auditor, and

the size of the public auditing firm, on the price of equity funding. The results showed

that a public accounting firm's size and having an industry-specialized auditor boosts the

trust of investors, so lowering the equity capital cost.

As stated by Salman and Setyaningrum (2023) the number of offices, professional

headcounts, and audit firm revenues are used to calculate the size of the audit firm.

According to Dekeyser et al. (2024) auditor firm specialization enhances auditor

incentives and skills, resulting in higher-quality audits, which is challenged by the idea

that an auditor's breadth of industry coverage benefits auditor performance. In addition to

 35

measuring audit quality, the study Gandía (2022) was added where this study examined

the effect of audit fees on the cost of debt. Ye (2020) defined an audit fee as

compensation. The implementation of fair audit fees was an essential requirement to

guarantee that certified public accountants carry out the standard information assurance

function and guarantee the smooth execution of the audit process, which is essential to

the auditor incentive system that guarantees the audit report's quality.

Conceptual Framework

The Input-Process-Output (IPO) Model is presented in Figure 1 and this serves as

the general structure and guide for the study showing the various inputs, processes, and

outputs involved

INPUT PROCESS OUTPUT

Assessment of Costs of
Capital in terms of:
 Data Gathering  Brochure as an
 Cost of Debt through Financial Information,
 Cost of Equity Statements and Education and
 Weighted SEC Form 17 - A Communication
Average Cost of
(IEC) Material on
Capital
 Data Audit Quality and
Analysis and Costs of Capital
Level of Audit Quality for Financial
Interpretation
in terms of: Institutions

 Audit Firm
Specialization
 Audit Fees
 Audit Firm Size

Figure 1.
 36

Conceptual Paradigm on the Impact of Audit Quality on Costs of Capital of

Financial Institutions Listed in the Philippine Stock Exchange

As shown in the figure, the study includes input variables such as the assessment

of capital costs of financial institutions listed in the Philippine Stock Exchange in terms

of, namely, cost of debt, cost of equity, and weighted average cost of capital. As well as

the level of audit quality in terms of the factors, namely, audit firm specialization, audit

fees, and audit firm size. The data gathered from the inputs will substantiate the study

with relevant information to form part of the process.

The process variable pertains to the processes to be undertaken for data gathering

which includes the collection of financial statements and the SEC Form 17 - A of

financial institutions for the years 2013 to 2022. The gathered data was analyzed and

interpreted with the use of statistical instruments such as frequency and percentage,

descriptive statistics, multiple linear regression, and t-test. The results of the analysis and

interpretation lead to an appropriate output for the study.

Lastly, the findings of the study will serve as the basis of the output variable

which is a brochure as an information, education, and communication material for

understanding more about audit quality and improving the costs of capital of financial

institutions listed in the PSE.

Definition of Terms

To facilitate the understanding of this study, different terms are defined herein.

Audit Fees. This term is the remuneration agreed on for the audit engagement,

this includes fees to conduct the auditor's objectives and compliance to the implemented

laws and auditing standards (PricewaterhouseCoopers, 2022). In this study, this refers to
 37

the necessary fees paid to the external auditors who undertook the audit of the financial

institutions which usually vary due to the time and procedures done.

Audit Firm Size. This term describes an audit firm in terms of its total revenues,

number of partners, number of staff professionals within the firm, and number of offices

they have (Arens, Elder, & Beasley, 2014). In this study, this refers to the scale the audit

firm operates, which can be determined through the audit firms being a part of the Big 4

audit firms, and those that are not part of the Big 4.

Audit Firm Specialization. This refers to an important consideration in choosing

an audit firm that can provide them with quality services to aid in efficient and effective

operations (Eldeeb & Hegazy, 2016). In this study, an audit firm's specialization and

expertise are distinguished by whether it has over 5 years of industry experience.

Audit Quality. This refers to a tool to gather unbiased proof of procedures,

highlight system flaws, find areas for development, and assess the success of corrective

measures aiming to evaluate the appropriateness and effectiveness of quality assurance

procedures (Qualifyze, 2023). In this study, this refers to factors influencing the

assurance to be given by the auditor about financial records, compliance to standards and

regulations, assessment of risks, and report of findings.

Auditors. This refers to individuals in charge of evaluating whether financial

statements comply with generally accepted accounting principles (GAAP), preventing

fraud, identifying inconsistencies in accounting procedures, and, at times, serve as

consultants to help enhance operational efficiency (Liberto, 2021). In this study, this

refers to those who examine the financial records to check for discrepancies and ensure

accuracy, verify compliance, and evaluate financial risk management as well as funding.
 38

Costs of Capital. This term refers to a rate of return a company must earn in

order to create value, in order to identify the accompanying financial risk and whether an

investment is worthwhile (Saalmuller, 2022). In this study, this refers to the expenses

incurred for the financing of operations and investments through debt or equity, as

reflected by the cost of debt, cost of equity, and weighted average cost of capital.

Cost of Debt. This term refers to the return offered by a company to its

debtholders and creditors as a compensation for the risks associated with lending to a

company (Team CFI, 2023). In this study, this refers to the expense the financial

institution must pay to raise capital from debts which reflects the rate of return expected

by debt holders and also serves as an indicator of financial health.

Cost of Equity. This term pertains to the expected rate of return on an investment

financed with equity which investors and business owners utilize as an indicator to

identify if an investment is beneficial (Elliott, 2022). In this study, this refers to the rate

of return paid by the financial institutions to their respective shareholders for the risks of

investing and shows the expense to raise capital through equity.

Financial Institutions. This term refers to institutions providing a variety of

financial services and serves as a marketplace of money and assets so they can be

efficiently distributed whenever required (Aggarwal, 2024). In this study, this refers to

organizations that mainly cater to the citizens, businesses, and the country providing

various financial services and offers including banks and other financial institutions like

holding companies and those for reinsurance.

Weighted Average Cost of Capital. This term refers to the total cost of capital

from all sources such as common shares, preferred shares, and debt, weighted by its
 39

proportion on the capital structure (Team CFI, 2024). In this study, this refers to the

financial metric which reflects the proportioned composition of debt and equity within

the capital structure of financial institutions, showing the financial outlay for capital

acquisitions.