Voluntary Audits and the Cost of Debt Capital for Privately Held Firms: Korean Evidence

57 Pages Posted: 21 Sep 2010

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Michael T. Stein

Old Dominion University

Cheong H. Yi

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: August 20, 2010

Abstract

Using a large sample of privately held Korean companies that are not required to obtain an external audit, this paper examines the value of voluntary external audits of financial statements with respect to the cost of debt. We find that private companies with an external audit pay a significantly lower interest rate on their debt than do private companies without an audit. However, we find no significant difference in the interest rate on debt between Big 4-audited and non-Big 4-audited companies. Finally, using a subset of sample firms that changed their engagement status from no audit to voluntary or mandatory audit, we find that the status change from no audit to being audited – either voluntarily or because the audit becomes mandatory as firms become sufficiently large to trigger a statutory audit – leads to significant savings in the interest cost of borrowing. Overall, our results suggest that external audit per se is of information value in the pricing of private debt in an environment where external audits are not mandatory.

Keywords: Voluntary audit, private companies, cost of debt, private debt pricing, Korea

Suggested Citation

Kim, Jeong-Bon and Simunic, Dan A. and Stein, Michael T. and Yi, Cheong H., Voluntary Audits and the Cost of Debt Capital for Privately Held Firms: Korean Evidence (August 20, 2010). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1680093

Jeong-Bon Kim (Contact Author)

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Michael T. Stein

Old Dominion University ( email )

Strome College of Business
Norfolk, VA VA 23529
United States
17576835495 (Phone)

Cheong H. Yi

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852-2766-7083 (Phone)
852-2330-9845 (Fax)

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