Does Audit Quality Affect Firms’ Debt Structure?

59 Pages Posted: 4 Oct 2017 Last revised: 11 Jun 2019

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: July 29, 2018

Abstract

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

Chen, Yangyang and Saffar, Walid and Srinidhi, Bin, Does Audit Quality Affect Firms’ Debt Structure? (July 29, 2018). Available at SSRN: https://ssrn.com/abstract=3047517 or http://dx.doi.org/10.2139/ssrn.3047517

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Walid Saffar (Contact Author)

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

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

Bin Srinidhi

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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