Does Financial Statement Audit Reduce the Cost of Debt of Private Firms?

U. Kosi, J. Koren, A. Valentincic, in: 2013.

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Conference Paper | English
Author
Kosi, UrskaLibreCat; Koren, Jerney; Valentincic, Aljosa
Abstract
This study examines the effect of audit on private firms’ cost of debt. We use a sample of 1,949 small private firms operating in the period 2006-2010 with optional financial statement audit. High quality data allows us to construct a more precise interest rate measure than existing studies employ. After controlling for obvious sources of demand for voluntary audits (ownership complexity, subsidiary status, bank relations), we find a robust central result that voluntary audits increase rather than decrease the cost of debt financing, contrary to several existing studies. This finding indicates that voluntary audits are generally treated as “adopting a label” and penalised by creditors, regardless of the perceived auditor quality as a result of the lemon problem in the audit market. Even Big-4 audits increase the cost of debt, likely as a result due to the lemon problem in the audit market, although the increase is smaller than for non-Big-4 audits. The results are sensitive to the estimation method used (OLS, Heckman’s two-step, PSM) and (sub-)sample selection. We show that disregarding the underlying assumptions of these estimation methods may lead to incorrect inferences. Additional analyses show that audited firms’ reported earnings are less informative about future operating performance than earnings of their unaudited counterparts. Our results also indicate that results are sensitive to cost of debt definition and this might have affected the results reported in the existing literature.
Publishing Year
Conference
36th Annual Congress of European Accounting Association
Conference Location
Paris, France
Conference Date
2013-05-02 – 2013-05-05
LibreCat-ID

Cite this

Kosi U, Koren J, Valentincic A. Does Financial Statement Audit Reduce the Cost of Debt of Private Firms? In: ; 2013.
Kosi, U., Koren, J., & Valentincic, A. (2013). Does Financial Statement Audit Reduce the Cost of Debt of Private Firms? 36th Annual Congress of European Accounting Association, Paris, France.
@inproceedings{Kosi_Koren_Valentincic_2013, title={Does Financial Statement Audit Reduce the Cost of Debt of Private Firms?}, author={Kosi, Urska and Koren, Jerney and Valentincic, Aljosa}, year={2013} }
Kosi, Urska, Jerney Koren, and Aljosa Valentincic. “Does Financial Statement Audit Reduce the Cost of Debt of Private Firms?,” 2013.
U. Kosi, J. Koren, and A. Valentincic, “Does Financial Statement Audit Reduce the Cost of Debt of Private Firms?,” presented at the 36th Annual Congress of European Accounting Association, Paris, France, 2013.
Kosi, Urska, et al. Does Financial Statement Audit Reduce the Cost of Debt of Private Firms? 2013.

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