The value of audit quality in public and private companies: evidence from Spain (original) (raw)
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African Journal of Business Management, 2018
This research studies the relation between audit firm choice and benefits that companies could gain in terms of lower cost of debt and earnings management. It focuses on private clients and the non-Big4 audit market segment, where the main driver of auditor choice has not to date been satisfactorily identified. This study identifies and tests a new criterion for auditor choice in private firms based on audit market boundaries (European vs. Domestic audit firms). Using a propensity score matched sample of private companies audited by non-Big4 audit firms in the period 2010 to 2014; this research finds that the choice of a European audit firm is negatively associated with cost of debt and earnings management. Private firms that choose audit firms operating at European level, as consequence, have lower cost of debt and earnings management, mitigate the agency conflicts between lenders and owner/manager, and improve their corporate governance mechanisms.
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This paper examines audit quality in private firms across different European countries. Prior research (e.g. Becker et al., 1998; Francis et al., 1999) has shown that audit quality provides a constraint on earnings management for public firms. We investigate whether audit quality differentiation also holds in private firms, constituting the majority of the EU economy and the EU market for audit services. This is an empirical question given that opposing arguments for (and against) the existence of a Big 4 audit quality difference between public and private firms can be given. Moreover, we question whether this audit quality difference, if any, is influenced by institutional factors. Using data on private firms of six European countries, this study provides evidence that, after controlling for self-selection, audit quality differentiation between Big 4 and non-Big 4 audit firms also exists in the private client segment market. However, we do not find support for an audit quality difference between second-tier and small audit firms. Consistent with prior research, we find that private companies domiciled in countries with a stronger investor protection engage less in earnings management. In addition, our results suggest that audit quality and investor protection are substitutes in constraining earnings management in private firms, in the sense that the Big 4 audit quality effect attenuates when investor protection is stronger.
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This study investigates whether managerial ownership related agency costs are associated with the demand for audit quality in a sample of small private firms. The literature on audit quality suggests that firms with high agency costs are more likely to demand audit quality. Our database enables us to compare the demand for audit quality with three different measures: demand for Big 4 auditors and two types of certified auditors with strict professional requirements. The results show that an increase in managerial ownership decreases the likelihood that the firm will engage a Big 4 auditor or a KHT certified auditor but it does not have an impact on the demand for lower level certified auditors. Our findings also support previous studies that suggest a nonlinear connection between managerial ownership and the demand for audit quality in terms of Big 4 audits. This suggests that higher quality audits by Big 4 audit firms are used to overcome agency costs induced by information asymmetries between shareholders and managers. An increase in leverage, on the other hand, increases the likelihood that the firm will engage a lower level certified auditor as opposed to a non-certified auditor.
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International Journal of Disclosure and Governance, 2022
The purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here, we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.
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Corporate governance, audit quality and the cost of debt financing of French listed companies
… from: http://papers. ssrn. com/sol3/ …, 2007
This paper investigates the effect of both corporate governance and audit quality on the cost of debt incurred by large French listed companies. Although France has a debt-oriented financing system, banks and other financial institutions have little direct implications in corporate governance structures (such as boards of directors for example). Thus, those external capital providers (i.e., debtholders) might pay attention to the overall quality of monitoring devices set up within companies, as well as to the quality of financial reporting. Hence, we may expect an inverse relation between the cost of debt and the quality of governance and auditing structure of public companies. Using a pooled sample of large, nonfinancial listed French companies over the years 1999 to 2001, the empirical findings reveal that corporate governance quality has a significant reducing effect on the cost of debt, whereas audit quality does not. Specifically, multivariate analyses document an inverse relation between the ex post cost of debt and (1) the proportion of independent directors on the board, (2) the existence of a compensation committee composed of nonexecutive directors, and (3) the presence of institutional shareholders with more than 5% of ownership.
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SSRN Electronic Journal, 2000
Previous research has set a firm position on quality and credibility of accounting information in the audit markets. and observed that brand name auditors provide higher assurance and credibility to the audited financial statements of companies with little or no trading history. However, in light of this reputable research, the established view from major professional accounting groups is that audits are the same regardless of the audit firm implying auditing homogeneity . The results from this analysis indicated that the price of a privately held company did not vary as a function of the audit firm performing the audit. Two analyses were performed comparing private companies audited by the largest ten accounting firms vs. all others, and Big 5(4) firms opposed to the remaining.