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The Effect of Auditor Choice on Financing Decisions

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  • Chang, Xin
  • Dasgupta, Sudipto
  • Hilary, Gilles

Abstract

We provide evidence that the financing decisions of companies that are audited by a Big Six auditor are less affected by information asymmetry. Specifically, these companies enjoy greater financial flexibility and depend less on favorable market conditions for their equity issuance decisions than those not audited by a Big Six firm. As a consequence, their debt ratios are less affected either by their past stock price performance or by Baker and Wurgler's [2002] measure of market timing. In addition, consistent with the idea that these firms are able to issue equity more regularly, we find that these firms have lower target debt ratios. These results are economically significant. They are robust to endogenizing the selection of the auditor and they hold both cross-sectionally and in panel settings.

Suggested Citation

  • Chang, Xin & Dasgupta, Sudipto & Hilary, Gilles, 2005. "The Effect of Auditor Choice on Financing Decisions," CEI Working Paper Series 2005-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2005-10
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13509/wp2005-10a.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jerry Sun & Guoping Liu, 2011. "Client-specific litigation risk and audit quality differentiation," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 300-316, April.
    2. Chen, Sheng-Syan & Wang, Yanzhi, 2012. "Financial constraints and share repurchases," Journal of Financial Economics, Elsevier, vol. 105(2), pages 311-331.
    3. Biddle, Gary C. & Hilary, Gilles & Verdi, Rodrigo S., 2009. "How does financial reporting quality relate to investment efficiency?," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 112-131, December.

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    More about this item

    Keywords

    Information asymmetry; Capital Structure; Auditor Quality;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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