An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Xin Chang
University of Melbourne

Sudipto Dasgupta
Hong Kong University of Science and Technology

Gilles Hilary
Hong Kong University of Science and Technology

Abstract: We provide evidence that the financing decisions of companies that are not audited by a Big Six auditor are more affected by information asymmetry. Specifically, these companies suffer from lower financial flexibility and depend more on favorable market conditions for their equity issuance decisions than those audited by a Big Six firm. As a consequence, when they have a window of opportunity to issue equity, they issue larger amounts. In addition, their debt ratios are more affected either by their past stock price performance or measures of market timing used in recent literature. Finally, also consistent with the idea that these companies are less able to issue equity regularly, they are more likely to issue debt as opposed to equity, and have higher 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.

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