（2009）The Effect of Auditor Quality on Financing Decisions.pdfVIP

THE ACCOUNTING REVIEW American Accounting Association Vol. 84, No. 4 DOI: 10.2308.accr.200085 2009 pp. 1085–1117 The Effect of Auditor Quality on Financing Decisions Xin Chang Nanyang Technological University Sudipto Dasgupta Hong Kong University of Science and Technology Gilles Hilary HEC Paris ABSTRACT: We present a model and provide empirical evidence showing that auditor quality affects the financing decisions of companies, and that higher audit quality re- duces the impact of market conditions on client financial decisions and capital struc- ture. Consistent with our analytical predictions, we find that companies audited by Big 6 firms are more likely to issue equity as opposed to debt than are those audited by small audit firms. We also find that companies audited by Big 6 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 show that the debt ratios of companies decrease less in response to favorable market conditions when auditor quality is high, at least over the medium term. Keywords: auditor quality; financial decisions; adverse selection; capital structure. Data Availability: All analyses are based on publicly available data. I. INTRODUCTION he theoretical literature has long recognized that the asymmetry of available infor- Tmation between companies and outside investors can affect companies’ financing choices.