Is Audit Opinion Shopping Priced in the Debt Market?

Abstract

We examine the relation between a firm’s opportunistic auditor switch for a favorable audit opinion, namely opinion shopping (OS) behavior, and the cost of debt. Using Korean listed firms for the period 2005-2020, we find that firms engaging in OS exhibit a higher cost of debt. This result remains robust to possible endogeneity concerns. We find that the negative consequences of OS in the debt market are more pronounced for firms with weaker governance and higher information asymmetry. Overall, our evidence suggests that OS is an important factor that debt market participants incorporate when assessing a firm’s credit risk.

Keywords: Cost of debt, credit risk, opinion shopping, external auditor, Corporate Governance