Does Audit Quality Affect Firms’ Debt Structure?
59 Pages Posted: 4 Oct 2017 Last revised: 11 Jun 2019
Date Written: July 29, 2018
Using a large sample of U.S. firms, we show that high audit quality is associated with a higher proportion of public debt and correspondingly a lower proportion of bank debt in firms’ debt financing. The findings are robust to endogeneity issues, alternative measures of audit quality and alternative model specifications. We also find that the effect of audit quality on the debt-mix is stronger in firms with high information asymmetry and poor governance. The results suggest that high audit quality improves firms’ transparency, alleviating the concerns of public lenders and thereby enabling firms to borrow more information-sensitive public debt. Particularly, the results suggest that high audit quality mitigates post-contract moral hazard between public debtholders and managers, which in turn reduces the advantage of bank loans arising from bank monitoring. Last, we show that audit quality is incrementally effective and has a substitutive effect over accruals quality, i.e., audit quality is more effective in shifting the debt preference towards public debt when accruals quality is lower.
Keywords: Audit Quality; Debt Financing Choice; Information Asymmetry; Corporate Governance
JEL Classification: G21; G32; M42
Suggested Citation: Suggested Citation