Voluntary Audit and the Cost of Debt Capital for Privately Held Firms: Korean Evidence

Abstract

Using a large sample of privately held Korean companies that are not required to obtain an external audit, this paper examines the informational value of voluntary external audits of financial statements with respect to the cost of debt. We find that private companies with an external audit pay a significantly lower interest rate on their debt than do private companies without an audit. Further, the interest rate on borrowing is significantly lower for Big 4-audited companies than for non-Big 4-audited companies. Finally, we find that a change in a company's status from no audit to being audited - either voluntarily or because the audit became mandatory - leads to significant savings in the cost of borrowing.

Keywords: Voluntary audit, Private companies, Cost of debt, Private debt pricing, Korea