The value of audit quality in public and private companies: evidence from Spain
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The value of audit quality in public and private companies: evidence from Spain Manuel Cano Rodrı´guez • Santiago Sa´nchez Alegrı´a
Published online: 5 July 2011 Ó Springer Science+Business Media, LLC. 2011
Abstract This paper compares the value of audit quality, proxied by the selection of a big N auditor, to the external claimholders of private and public companies. Although the combination of a lower ownership concentration of public companies, the greater demand for financial information quality about these companies and their higher litigation risk can result in the expectation that audit quality should be more valuable for public than for private companies, the greater information asymmetry between the managers and the external stakeholders and the unavailability of alternative mechanisms for monitoring the managers can make external audit more valuable for the external claimholders of private companies. In this paper, we test these two competing views by analysing if banks and lenders take into account auditor selection in the formation of the cost of debt. Our results support the second view: we find that only private companies obtain a lower cost of debt when they are audited by a high-quality auditor. These results are robust to both endogeneity and unobserved firm-specific heterogeneity. Keywords Audit quality Agency problems Big N auditors Private companies Cost of debt
M. Cano Rodrı´guez (&) Department of Financial Economics and Accounting, University of Jae´n, Paraje Las Lagunillas s/n, 23071 Jae´n, Spain e-mail: [email protected] S. Sa´nchez Alegrı´a Department of Business Administration, Public University of Navarra, Edificio Departamental de los Madron˜os, Campus Arrosadı´a, 31006 Pamplona, Spain e-mail: [email protected]
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M. Cano Rodrı´guez, S. Sa´nchez Alegrı´a
1 Introduction This paper analyses the value of external audit quality to the claimholders of private and public companies by testing two alternative views. The first view hypothesizes that, although audit quality can be valuable to both private and public companies, this value is expected to be higher for the claimholders of public companies. Three reasons support this argument. (1) The agency problems that arise from the separation of ownership and control are usually more important among public than among private firms because the ownership of the capital is often less concentrated in the hands of the managers of public companies (Chaney et al. 2004). Consequently, the demand for monitoring and bonding mechanisms that reduce these agency problems, such as external auditing, is expected to be higher for public than for private companies. (2) According to the information hypothesis, external auditing can also be demanded because it improves the quality of the public financial information of the company. However, capital providers to private companies are expected to demand a lower level of public financial information quality, because they often have insider access to corporate information (Ball and Shivakumar 20
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