Do Banks Value Audit Reports or Auditor Reputation? Evidence from Private Spanish Firms (original) (raw)

Abstract

This paper studies the relevance of audit qualifications and auditor selection for the external stakeholders of private companies in code-law countries. Employing a sample of private Spanish firms, we find that the cost of debt is not influenced by auditor opinion, but it is strongly influenced by the selection of a highquality auditor. These findings suggest that Spanish banks' and lenders' decisions are more influenced by the reputation of the auditor than by the content of the audit report. These results are robust to both the unobserved heterogeneity problem and the potential endogenous nature of the explanatory variables.

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  61. Panel A shows the difference GMM estimates of the coefficients of models (3) (in the left column) and (4) (in the right column). The dependent variable is Cost of Debt it : interest expense over the average cost- bearing debt between t-1 and t. The explanatory variables are defined as follows. Cost of Debt it-1 : lagged value of the dependent variable. Unqualified it-1 : dummy variable equal to 1 if the firm has received a clean audit report and 0 otherwise. Qualified it-1 : dummy variable equal to 1 if the firm has received a qualified report and 0 otherwise. Adverse it-1 : dummy variable equal to 1 when the issued opinion is adverse and 0 otherwise. Disclaimer it-1 : dummy variable equal to 1 if the opinion is "disclaimer of opinion" and 0 otherwise. Big it-1 : dummy variable equal to 1 if the firm is audited by a Big N auditor and 0 otherwise. Size it : natural logarithm of total assets in year t. Profitability it : net income in year t over total assets in t-1.
  62. Coverage it : ratio of earnings before interest, extraordinary items, depreciation and amortization over interest expenses. Leverage it : total debt over total assets. Growth it : change in sales from year t-1 to year t over assets at t-1. Current it : current assets over current liabilities. Collateral it : fixed assets to total assets. Models (3) and (4) also include industry dummies to control for industry-specific effects. However, for the sake of simplicity, their coefficients are not tabulated. z 1 and z 2 indicate the value of two Wald tests of joint significance of the tabulated coefficients and the time-dummy coefficients respectively. Degrees of freedom are reported in parentheses. m2 is the Arellano and Bond (1991) serial correlation test of order 2 using residuals in first differences. Hansen is the Hansen test of overidentifying restrictions, reporting the degrees of freedom in parentheses. † indicates significance at the 0.1 level. * indicates significance at the 0.05 level. ** indicates significance at the 0.01 level. *** indicates significance at the 0.001 level. Panel B presents the influence of the type of opinion on the cost of debt. Specifically, on the left side of the table, we use the cost of debt of a firm audited by a non-Big N auditor and with a qualified opinion as the base. Then, we employ the coefficients of model (1) to estimate the variations in the cost of debt for the following cases. (a) If the firm receives a clean report and it is audited by a non-Big N auditor (α 2 ). (b) If the firm receives a clean report and it is audited by a Big N auditor (α 2 + α 4 ). Finally, (c) the average variation when a company receives a clean report (α 2 + α 4 × P Big , where P Big is the proportion of observations for which variable Big it is equal to 1). The t-tests are reported in parentheses. On the right side