The Effect of Auditor Quality on Financing Decisions

The Accounting Review, Forthcoming

48 Pages Posted: 22 Oct 2008 Last revised: 29 Aug 2013

Xin (Simba) Chang

Cambridge Judge Business School; Nanyang Business School

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Date Written: October 21, 2008

Abstract

We present a model and provide empirical evidence showing that auditor quality affects companies' financing decisions, and that better audit quality reduces the impact of market conditions on client financial decisions and capital structure. Consistent with our analytical predictions, we find that companies audited by Big 6 firms are more likely to issue equity as opposed to debt than are those audited by small audit firms. We also find that companies audited by Big 6 auditors are able to make larger equity issues than are those audited by small auditors, but the difference narrows when market conditions improve. Additional results show that the debt ratios of companies decrease less in response to favorable market conditions when auditor quality is high, at least over the medium term.

JEL Classification: M49, G32

Suggested Citation

Chang, Xin (Simba) and Dasgupta, Sudipto and Hilary, Gilles, The Effect of Auditor Quality on Financing Decisions (October 21, 2008). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1287544 or http://dx.doi.org/10.2139/ssrn.1287544

Xin Chang

Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://sites.google.com/site/simbachangxin/

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7666 (Phone)
852-2358-1749 (Fax)

Gilles Hilary (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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