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The Effect of Auditor Choice on Financing Decisions
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 auditor quality affects companies’ financing decisions and that the incremental impact of auditor quality depends on market conditions. Consistent with the predictions of our model, we find that companies audited by Big Six firms are more likely to issue equity as opposed to debt than are those audited by a small audit firm. We also find that companies audited by Big Six 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 also show that the effect of auditor size on issuances affects a company’s capital structure at least in the medium term. These results are economically significant. They are robust to endogenizing the selection of the auditor, inclusion of the number of analysts following a company and its debt ratings. Our key results hold both cross-sectionally and in panel settings.
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