Do audited firms have a lower cost of debt?

Asif M. Huq (), Fredrik Hartwig () and Niklas Rudholm ()
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Asif M. Huq: Dalarna University
Fredrik Hartwig: University of Gävle
Niklas Rudholm: Institute of Retail Economics

International Journal of Disclosure and Governance, 2022, vol. 19, issue 2, No 3, 153-175

Abstract: Abstract 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.

Keywords: External audit; Regulation; Agency theory; Audit reform; Audit complexity; Cost of capital; Endogenous switching model; Private limited firms (search for similar items in EconPapers)
JEL-codes: D22 D24 M42 M48 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41310-021-00133-1

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