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The Effect of Auditor Quality on Financing Decisions

Author

Listed:
  • Gilles Hilary

    (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)

  • Sudipto Dasgupta

    (HKUST - Hong Kong University of Science and Technology)

  • Xing Chang

Abstract

We present a model and provide empirical evidence showing that auditor quality affects companies' financing decisions, and that better audit quality reduces the impact of market conditions on client financial decisions and capital structure. Consistent with our analytical predictions, we find that companies audited by Big 6 firms are more likely to issue equity as opposed to debt than are those audited by small audit firms. We also find that companies audited by Big 6 auditors are able to make larger equity issues than are those audited by small auditors, but the difference narrows when market conditions improve. Additional results show that the debt ratios of companies decrease less in response to favorable market conditions when auditor quality is high, at least over the medium term.

Suggested Citation

  • Gilles Hilary & Sudipto Dasgupta & Xing Chang, 2009. "The Effect of Auditor Quality on Financing Decisions," Post-Print hal-00481935, HAL.
    • Handle: RePEc:hal:journl:hal-00481935
    as

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