Financial Constraints, Auditing, and External Financing

59 Pages Posted: 22 Oct 2020 Last revised: 8 Mar 2022

See all articles by Ahmet C. Kurt

Ahmet C. Kurt

Bentley University - Department of Accountancy

Mary J Becker

Canisius College - Department of Economics and Finance

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: March 7, 2022

Abstract

This paper examines the role of costly audit signals in future external financing activity of financially constrained firms. We document that when facing higher financial constraints, firms pay higher audit fees and have their audit reports completed sooner. Equally important, we find that costlier and timelier audits are associated with greater amount of future financing raised by equity-seeking, but not debt-seeking, constrained firms. Our results are robust to controlling for various audit characteristics and risk factors. Additional analysis shows that equity-seeking constrained firms which underwent costlier audits exhibit more favorable outcomes with respect to long-run stock performance and investment efficiency following seasoned equity offerings. Our findings suggest that while financially constrained firms are pressured to make cuts across various expenditure categories, negotiating lower audit fees in the face of higher financial constraints may not be a wise strategy.

Keywords: Financial constraints, Audit fees, Audit lag, External financing, Seasoned equity offerings

JEL Classification: G32, M42

Suggested Citation

Kurt, Ahmet C. and Becker, Mary J and Hoitash, Rani and Hoitash, Udi, Financial Constraints, Auditing, and External Financing (March 7, 2022). Available at SSRN: https://ssrn.com/abstract=3686251 or http://dx.doi.org/10.2139/ssrn.3686251

Ahmet C. Kurt (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Mary J Becker

Canisius College - Department of Economics and Finance ( email )

United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

HOME PAGE: http://www.xbrlresearch.com

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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