Cost of Debt for Private Firms Revisited: Voluntary Audits as a Reflection of Risk

67 Pages Posted: 28 May 2021

See all articles by Riste Ichev

Riste Ichev

University of Ljubljana - Faculty of Economics

Jernej Koren

University of Ljubljana - Faculty of Economics

Urska Kosi

Paderborn University; University of Ljubljana - Faculty of Economics

Katarina Sitar Sustar

University of Ljubljana

Aljosa Valentincic

University of Ljubljana - Faculty of Economics

Date Written: May 2020

Abstract

This study examines the relation between voluntary audit and the cost of debt in private firms. We use a sample of 4,058 small private firms operating in the period 2006‐2017 that are not subject to mandatory audits. Firms decide for a voluntary audit of financial statements either because the economic setting in which they operate effectively forces them to do so (e.g., ownership complexity, export‐oriented supply chain, subsidiary status) or because firm fundamentals and/or financial reporting practices limit their access to financial debt, both reflected in earnings quality. We use these factors to model the decision for voluntary audit. In the outcome analyses, we find robust evidence that voluntary audits are associated with higher, rather than lower, interest rate by up to 3.0 percentage points. This effect is present regardless of the perceived audit quality (Big‐4 vs. non‐Big‐4), but is stronger for non‐Big‐4 audits where auditees have a stronger position relative to auditors. Audited firms’ earnings are less informative about future operating performance relative to unaudited counterparts. We conclude that voluntary audits facilitate access to financial debt for firms with higher risk that may otherwise have no access to this form of financing. The price paid is reflected in higher interest rates charged to firms with voluntary audits – firms with higher information and/or fundamental risk.

Keywords: private firms, voluntary audit, cost of debt, self‐selection bias, risk

JEL Classification: M4, M42, M49

Suggested Citation

Ichev, Riste and Koren, Jernej and Kosi, Urska and Sitar Sustar, Katarina and Valentincic, Aljosa, Cost of Debt for Private Firms Revisited: Voluntary Audits as a Reflection of Risk (May 2020). TRR 266 Accounting for Transparency Working Paper Series No. 26, Available at SSRN: https://ssrn.com/abstract=3853927 or http://dx.doi.org/10.2139/ssrn.3853927

Riste Ichev

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Jernej Koren

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Urska Kosi

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Katarina Sitar Sustar

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

Aljosa Valentincic (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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