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Do audited firms have a lower cost of debt?

Author

Listed:
  • Asif M. Huq

    (Dalarna University)

  • Fredrik Hartwig

    (University of Gävle)

  • Niklas Rudholm

    (Institute of Retail Economics)

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.

Suggested Citation

  • Asif M. Huq & Fredrik Hartwig & Niklas Rudholm, 2022. "Do audited firms have a lower cost of debt?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(2), pages 153-175, June.
    • Handle: RePEc:pal:ijodag:v:19:y:2022:i:2:d:10.1057_s41310-021-00133-1
    DOI: 10.1057/s41310-021-00133-1
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    References listed on IDEAS

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    More about this item

    Keywords

    External audit; Regulation; Agency theory; Audit reform; Audit complexity; Cost of capital; Endogenous switching model; Private limited firms;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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