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The Role of Reputable Auditors and Underwriters in the Design of Bond Contracts

Author

Listed:
  • Yun Lou

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Florin P. Vasvari

    (CEPR - London Business School)

Abstract

We empirically test the certification hypothesis by studying the roles of reputable auditors and bank underwriters in the design of bond contracts. The certification hypothesis suggests that reputable capital market intermediaries can credibly communicate inside information to outside investors, thereby helping improve financing terms for firms that raise external funding. Consistent with this hypothesis, we provide evidence that reputable auditors and underwriters help corporate bond issuers obtain lower bond yields. The effect of reputable auditors on the yields is greater than that of reputable underwriters in terms of economic magnitude and significance, consistent with auditors' multiple roles as information intermediaries, monitors and insurance providers. We also find that the presence of reputable auditors and underwriters affects bonds' non-pricing terms. Firms that hire reputable auditors obtain longer-term bonds, while those that engage reputable underwriters can issue larger bonds. Taken together, our results suggest that reputable auditors and underwriters have integral, but different, roles in the bond issuing process.

Suggested Citation

  • Yun Lou & Florin P. Vasvari, 2013. "The Role of Reputable Auditors and Underwriters in the Design of Bond Contracts," Post-Print hal-00853668, HAL.
    • Handle: RePEc:hal:journl:hal-00853668
    DOI: 10.1177/0148558X11421673
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    Citations

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    Cited by:

    1. Juan L. Gandía & David Huguet, 2021. "Combined Effects of Auditing and Discretionary Accruals on the Cost of Debt: Evidence From Spanish SMEs," SAGE Open, , vol. 11(4), pages 21582440211, October.
    2. Westfall, Tiffany J. & Myring, Mark, 2022. "Are voluntary internal control weakness disclosures in initial public offerings associated with managerial ability and subsequent financial reporting quality?," Advances in accounting, Elsevier, vol. 59(C).
    3. Abdul Halim, Zairihan & How, Janice & Verhoeven, Peter & Hassan, M. Kabir, 2019. "The value of certification in Islamic bond offerings," Journal of Corporate Finance, Elsevier, vol. 55(C), pages 141-161.
    4. Chy, Mahfuz & De Franco, Gus & Su, Barbara, 2021. "The effect of auditor litigation risk on clients' access to bank debt: Evidence from a quasi-experiment," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    5. Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).
    6. Sudipta Basu & Eunju (Ivy) Lee, 2022. "Antecedents of and outcomes after finance committee use," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 491-535, March.
    7. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2017. "Do banks and industrial companies have equal access to reputable underwriters in debt markets?," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 176-202.
    8. Baylis, Richard M. & Burnap, Peter & Clatworthy, Mark A. & Gad, Mahmoud A. & Pong, Christopher K.M., 2017. "Private lenders’ demand for audit," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 78-97.

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