The Effect of Auditor Choice on Financing Decisions

Xin Chang · Sudipto Dasgupta · Gilles Hilary

36 citations0/0 files storedRePEc: Research Papers in Economics

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Corporate Finance and Governance Auditing, Earnings Management, Governance Financial Analysis and Corporate Governance

Abstract

We provide evidence that the financing decisions of companies that are audited by a Big Six auditor are less affected by information asymmetry. Specifically, these companies enjoy greater financial flexibility and depend less on favorable market conditions for their equity issuance decisions than those not audited by a Big Six firm. As a consequence, their debt ratios are less affected either by their past stock price performance or by Baker and Wurgler's [2002] measure of market timing. In addition, consistent with the idea that these firms are able to issue equity more regularly, we find that these firms have lower target debt ratios. These results are economically significant. They are robust to endogenizing the selection of the auditor and they hold both cross-sectionally and in panel settings.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1958The Cost of Capital, Corporation Finance and the Theory of Investment 1973Risk, Return, and Equilibrium: Empirical Tests 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 1995What Do We Know about Capital Structure? Some Evidence from International Data 2001The theory and practice of corporate finance: evidence from the field 1981Auditor size and audit quality

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