Auditor Choice and the Cost of Debt Capital for Newly Public Firms

Posted: 9 Dec 2003

See all articles by Jeffrey Pittman

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Steve Fortin

University of Waterloo - School of Accounting and Finance

Abstract

We examine the impact of auditor choice on debt pricing in firms' early public years when they are lesser known. Our evidence suggests that retaining a Big Six auditor, which can reduce debt monitoring costs by enhancing the credibility of financial statements, enables young firms to lower their borrowing costs. Extant research implies that information asymmetry between borrowers and lenders is decreasing in firm age. We also provide evidence consistent with our predictions that choosing a Big Six auditor affects firms' interest rates less over time and particularly benefits firms with short private histories that initially experience worse information problems.

Keywords: audit quality, firm-lender relationships, asymmetric information, contracts and reputation

JEL Classification: D82, L14, G32, M40, M49

Suggested Citation

Pittman, Jeffrey A. and Fortin, Steve, Auditor Choice and the Cost of Debt Capital for Newly Public Firms. Journal of Accounting & Economics, Vol. 37, No. 1, pp. 113-136, February 2004. Available at SSRN: https://ssrn.com/abstract=474385

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Steve Fortin

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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