Audit Fees and Capital Structure Decision

Abstract

Prior studies in the US have examined the impact of Big 6 auditors on financing decision and find that firms engaged with Big 6 auditors tend to issue equity as opposed to debt. Using a broad US sample, this study examines the impact of audit fees on capital structure decision. We use audit fees as a proxy for audit quality. Our results show that firms with higher audit fees tend to have higher leverage. We further find that firms paying high audit fees are more inclined to issue debt. As a robustness check we also use expected audit fees as a proxy for audit quality and find consistent results. These findings suggest that the impact of audit fees has significant effect on capital structure decision.

Keywords: audit quality; capital structure; Big 6 auditors; audit fee

JEL Classification: G14, G32