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    Cross-Country Evidence on the Importance of Auditor Choice...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 15.0 International Matters 
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    Title:
    Cross-Country Evidence on the Importance of Auditor Choice to Corporate Debt Maturity
    Practical Implications:

     This paper provides new evidence on how higher-audit quality benefit companies in debt contracting. Specifically, the authors show that Big 4 audit clients enjoy a longer debt maturity than non-Big 4 clients. This audit quality effect on debt maturity exists worldwide but varies with each country’s legal institutions governing property rights and creditor rights. This paper helps to resolve the mix views in prior literature on the role of Big 4 auditors and stresses the importance of considering legal institutions in analyzing the link between auditor choice and economic outcomes.

    Citation:

     Ghoul, S. E., O. Guedhami, J. A. Pittman, and S. Rizeanu. 2016. Cross-Country Evidence on the Importance of Auditor Choice to Corporate Debt Maturity. Contemporary Accounting Research 33 (2): 718–751.

    Keywords:
    Audit quality, corporate governance, legal institutions, debt maturity
    Purpose of the Study:

     Prior research finds audited financial statements provide useful information to lenders and help lenders to better monitor the borrowing companies. However, there is little empirical evidence on how higher-audit quality affects the lender’s choice on monitoring mechanisms. The authors intend to provide the initial and international evidence on how lenders weigh the monitoring from auditors against their own monitoring through shorter debt maturity. Because the Big 4 auditors is generally accepted in academic literature as a proxy for higher-audit quality, the authors examine whether engaging Big 4 auditors benefits the companies in debt contracting. The degree of legal institutions governing property rights and creditor rights various across countries. The authors argue strong legal institutions can amplify the effect of audit quality on debt maturity because monitoring from the Big 4 auditors is more rigorous and borrowers are ex ante incentivized to be honest. Therefore, the authors next investigate whether legal institutions mediate the link between auditor choice and debt maturity.

    Design/Method/ Approach:

     The initial sample consists of all public companies from 42 countries around the world, including the U.S., the U.K., Canada, Malaysia, Hong Kong, and so on, for 10-year period from 1994 to 2003. The company financial and audit data are from COMPUSTAT Global database. The authors first examine whether companies with Big 4 auditors have higher proportion of long-term debt in their capital structure. They then test whether legal institutions have a mediating effect on the relationship between audit quality and debt maturity.

    Findings:

    The initial sample consists of all public companies from 42 countries around the world, including the U.S., the U.K., Canada, Malaysia, Hong Kong, and so on, for 10-year period from 1994 to 2003. The company financial and audit data are from COMPUSTAT Global database. The authors first examine whether companies with Big 4 auditors have higher proportion of long-term debt in their capital structure. They then test whether legal institutions have a mediating effect on the relationship between audit quality and debt maturity.  

    Category:
    Audit Quality & Quality Control, International Matters