Spend Money to Make Money?: Voluntary Audit Reviews and Firms’ Cost of Debt

Posted: 31 Jan 2019 Last revised: 22 Sep 2021

See all articles by Vlad-Andrei Porumb

Vlad-Andrei Porumb

University of Manchester - Alliance Manchester Business School

Yasemin Zengin-Karaibrahimoglu

University of Groningen

Shuo Wang

University of Groningen

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: January 31, 2021

Abstract

An audit review (AR) is a mechanism used by boards to assess the quality of interim financial reports on a timely basis. In this study, we analyze whether the voluntary purchase of an AR reduces the screening costs of lenders and translates into lower cost of debt for borrowers. We use a sample of 8,021 firm-year observations from 1,678 public firms in Canada over the period 2004-2015 to test this prediction. The results suggest that firms with voluntary ARs have a lower cost of debt than firms with no AR. Further analyses using samples of public bonds and private loans corroborate our findings. Cross-sectional analyses suggest that, for borrowers with higher information asymmetry, the impact of voluntary ARs is incrementally stronger only for public debt. Our study is the first to document that the voluntary purchase of ARs caters to lenders’ informational needs and benefits listed borrowers through a lower cost of debt financing.

Suggested Citation

Porumb, Vlad-Andrei and Zengin-Karaibrahimoglu, Yasemin and Wang, Shuo and Lobo, Gerald J., Spend Money to Make Money?: Voluntary Audit Reviews and Firms’ Cost of Debt (January 31, 2021). Available at SSRN: https://ssrn.com/abstract=3318601 or http://dx.doi.org/10.2139/ssrn.3318601

Vlad-Andrei Porumb (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Yasemin Zengin-Karaibrahimoglu

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Shuo Wang

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

HOME PAGE: http://https://www.rug.nl/staff/shuo.wang/projects

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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