Real Effects of the Audit Choice

58 Pages Posted: 5 Oct 2015 Last revised: 11 Aug 2016

Asad Kausar

Nanyang Technological University (NTU)

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Hal D. White

Penn State University

Date Written: August 10, 2016

Abstract

We hypothesize that the choice to obtain a financial statement audit provides external financiers with incremental information about the firm, which helps reduce information asymmetry and financing frictions. Using a natural experiment, we show that when external financiers observe a firm’s choice to voluntarily obtain an audit, the firms obtaining an audit significantly increase their debt, investment, and operating performance, and become more responsive to their investment opportunities. Further, we find that these effects are stronger for firms that are financially constrained and weaker for firms with other means to reduce financing frictions. Overall, our evidence suggests that the audit choice conveys information to capital providers, which reduces financing frictions and improves performance.

Keywords: Audit; Financial reporting; Regulation; Investment; Debt; Financing constraints; Signaling

JEL Classification: G3; H8; M4

Suggested Citation

Kausar, Asad and Shroff, Nemit and White, Hal D., Real Effects of the Audit Choice (August 10, 2016). Journal of Accounting & Economics (JAE), Vol. 62, No. 1, 2016, pp. 157-181.. Available at SSRN: https://ssrn.com/abstract=2669251

Asad Kausar

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main St.
E62-679
Cambridge, MA MA 02142
United States
6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

Hal D. White

Penn State University ( email )

210 Business Building
Smeal College of Business
University Park, PA 16802-3306
United States
814-863-7055 (Phone)

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