Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/93374
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Title: Does audit quality affect firms' debt structure?
Authors: Chen, Y
Saffar, W 
Srinidhi, B
Issue Date: Mar-2021
Source: China accounting and finance review (中國會計與財務硏究), Mar. 2021, v. 23, no. 1, p. 34-69
Abstract: Using a large sample of US firms, we show that high audit quality is associated with a higher proportion of public debt and correspondingly a lower proportion of bank debt in firms’ debt financing. The findings are robust to endogeneity issues, alternative measures of audit quality, and alternative model specifications. We also find that the effect of audit quality on the debt mix is stronger in firms with high information asymmetry and poor governance. The results suggest that high audit quality improves firms’ transparency, alleviating the concerns of public lenders and thereby enabling firms to borrow more information-sensitive public debt. Particularly, the results suggest that high audit quality mitigates the post-contract moral hazard between public debtholders and managers, which in turn reduces the advantage of bank loans arising from bank monitoring. Last, we show that audit quality is incrementally effective and has a substitutive effect over accruals quality (i.e. audit quality is more effective in shifting the debt preference towards public debt when accruals quality is lower).
Keywords: Audit quality
Debt financing choice
Information asymmetry
Corporate governance
Journal: China accounting and finance review (中國會計與財務硏究) 
ISSN: 1029-807X
EISSN: 2307-3055
Rights: © The Author(s) 2021. This article is published with open access by The Hong Kong Polytechnic University.
The following publication Chen, Yangyang and Saffar, Walid and Srinidhi, Bin, Does Audit Quality Affect Firms’ Debt Structure? (July 29, 2018). Available at SSRN: http://dx.doi.org/10.2139/ssrn.3047517
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