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Does leverage influence auditor choice? A cross-country analysis

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  • Geraldine Broye
  • Laurent Weill

Abstract

This article investigates the impact of legal environment on the relationship between leverage and auditor choice in 10 European countries. We demonstrate that the relationship between the choice of a high-quality auditor and firm leverage varies significantly across countries. This finding suggests the absence of a systematic demand for auditing to mitigate agency problems between insiders and debtholders. These differences are explained through legal environment indicators. We create in this aim an index to measure auditor liability exposure. Our results provide evidence that the stronger the protection of creditor rights and disclosure requirements, the higher the demand for audit quality by highly-leveraged companies. Inversely, the auditor liability exposure has a negative impact on the link between leverage and auditor choice.

Suggested Citation

  • Geraldine Broye & Laurent Weill, 2008. "Does leverage influence auditor choice? A cross-country analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 18(9), pages 715-731.
  • Handle: RePEc:taf:apfiec:v:18:y:2008:i:9:p:715-731
    DOI: 10.1080/09603100701222325
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    1. repec:taf:acctbr:v:47:y:2017:i:5:p:565-584 is not listed on IDEAS
    2. Leif Atle Beisland & Roy Mersland & R. Oystein Strøm, 2012. "Audit Quality and Corporate Governance: Evidence from the Microfinance Industry," Working Papers CEB 12-034, ULB -- Universite Libre de Bruxelles.
    3. Jamel Azibi & Hubert Tondeur & Mohamed Tahar Rajhi, 2010. "Auditor Choice And Intitutionnel Investor Characteristics After The Enron Scandal In The French Context," Post-Print hal-00481076, HAL.
    4. repec:eco:journ1:2018-02-7 is not listed on IDEAS
    5. repec:kap:jmgtgv:v:22:y:2018:i:2:d:10.1007_s10997-017-9386-4 is not listed on IDEAS
    6. repec:eee:spacre:v:15:y:2012:i:2:p:287-310 is not listed on IDEAS
    7. Maarten Corten & Tensie Steijvers & Nadine Lybaert, 2015. "The demand for auditor services in wholly family-owned private firms: the moderating role of generation," Accounting and Business Research, Taylor & Francis Journals, vol. 45(1), pages 1-26, January.
    8. Reheul, Anne-Mie & Van Caneghem, Tom & Verbruggen, Sandra, 2011. "Auditor choice in the Belgian nonprofit sector: a behavioral perspective," Working Papers 2011/36, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    9. Charles Piot & Alain Schatt, 2010. "La réglementation de l’audit est-elle dans l’intérêt public:quelques enseignements du modèle français," Working Papers CREGO 1100606, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    10. repec:jso:coejss:v:6:y:2017:i:4:p:886-901 is not listed on IDEAS

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