The role of auditor choice in debt pricing in private firms

Contemporary Accounting Research

Volumn 24, Issue 3, 2007, Pages 859-896

  Fortin, Steve ^a   Pittman, Jeffrey A ^b,c  

^a MCGILL UNIVERSITY   (Canada)

^b HONG KONG UNIVERSITY OF SCIENCE AND TECHNOLOGY   (Hong Kong)

^c MEMORIAL UNIVERSITY OF NEWFOUNDLAND   (Canada)

Author keywords

Asymmetric information; Audit quality; Contracts and reputation; Firm lender relationships

Indexed keywords

EID: 34948887106     PISSN: 08239150     EISSN: 19113846     Source Type: Journal    
DOI: 10.1506/car.24.3.8     Document Type: Article

References (99)

1. Altman, E. I. 1968. Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. The Journal of Finance 23 (4): 589-609.
2. Anderson, D., J. Francis, and D. Stokes. 1993. Auditing, directorships and the demand for monitoring. Journal of Accounting and Public Policy 12 (4): 353-75.
3. Ang, J. S. 1992. On the theory of finance for privately held firms. Journal of Small Business Finance 1 (3): 185-203.
4. Baber, W., K. Kumar, and T. Verghese. 1995. Client security price reactions to the Laventhol and Horwath bankruptcy. Journal of Accounting Research 33 (2): 385-95.
5. Ball, R., and L. Shivakumar. 2004. Earnings quality in U.K. private firms. Journal of Accounting and Economics 39 (1): 83-128.
6. Balvers, R. J., B. McDonald, and R. E. Miller. 1988. Underpricing of new issues and the choice of auditor as a signal of investment banker reputation. The Accounting Review 63 (4): 605-22.
7. Beatty, A., B. Ke, and K. Petroni. 2002. Earnings management to avoid earnings declines across publicly and privately held banks. The Accounting Review 77 (3): 547-70.
8. Beaver, W. H., M. McNichols, and K. Nelson. 2003. Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry. Journal of Accounting and Economics 35 (3): 347-76.
9. Beaver, W. H., C. Shakespeare, and M. T. Soliman. 2006. Differential properties in the ratings of certified vs. non-certified bond rating agencies. Journal of Accounting and Economics 42 (3): 303-34.
10. Becker, C., M. L. DeFond, J. Jiambalvo, and K. R. Subramanyam. 1998. The effect of audit quality on earnings management. Contemporary Accounting Research 15 (1): 1-24.
11. Beneish, M. 1997. Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy 16 (3): 271-309.
12. Bharat, S. T., J. Sunder, and S. V. Sunder. 2006. Accounting quality and debt contracting. Working paper, University of Michigan.
13. Blackwell, D., T. Noland, and D. Winters. 1998. The value of auditor assurance: Evidence from loan pricing. Journal of Accounting Research 36 (1): 57-70.
14. Burgstahler, D. C., L. Hail, and C. Leuz. 2006. The importance of reporting incentives: Earnings management in European private and public firms. The Accounting Review 81 (5): 983-1016.
15. Cantor, R., F. Packer, and K. Cole. 1997. Split ratings and the pricing of credit risk. Journal of Fixed Income 6 (1): 72-82.
16. Carcello, J. V., and A. L. Nagy. 2004. Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice & Theory 23 (2): 55-69.
17. Chaney, P. K., D. C. Jeter, and L. Shivakumar. 2004. Self-selection of auditors and auditor pricing in private firms. The Accounting Review 79 (1): 51-72.
18. Chaney, P. K., D. C. Jeter, and L. Shivakumar. 2005. Self-selection of auditors and size nonlinearities in audit pricing. Working paper, Vanderbilt University.
19. Chaplinsky, S., and L. Ramchand. 2004. The impact of SEC rule 144A on corporate debt issuance by international firms. Journal of Business 77 (4): 1073-97.
20. Choi, J-H., and R. Doogar. 2005. Audit tenure and audit quality: Evidence from going-concern qualifications issued during 1996-2001. Working paper, Hong Kong University of Science and Technology.
21. County of Orange v. McGraw Hill. 1999. 245 BR 151 (CD. Cal.).
22. Covitz, D. M., and P. Harrison. 2003. Testing conflicts of interest at bond rating agencies with market anticipation: Evidence that reputation incentives dominate. Working paper, Federal Reserve Board.
23. Crouhy, M., D. Galai, and R. Mark. 2001. Prototype risk rating system. Journal of Banking and Finance 25 (1): 47-95.
24. Datta, S., M. Iskandardatta, and A. Patel. 1999. Bank monitoring and the pricing of corporate public debt. Journal of Financial Economics 51 (3): 435-49.
25. Davis, L. R., B. Soo, and G. Trompeter. 2002. Auditor tenure, auditor independence and earnings management. Working paper, Boston College.
26. DeAngelo, L. 1981a. Auditor independence, "low balling", and disclosure regulation. Journal of Accounting and Economics 3 (2): 113-27.
27. DeAngelo, L. 1981b. Auditor size and audit quality. Journal of Accounting and Economics 3 (3): 183-99.
28. DeFond, M. L. 1992. The association between changes in client firm agency costs and auditor switching. Auditing: A Journal of Practice & Theory 11 (1): 16-31.
29. DeFond, M., and J. Jiambalvo. 1994. Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics 17 (1-2): 145-76.
30. Diamond, D. W. 1984. Financial intermediation and delegated monitoring. Review of Economic Studies 51 (3): 393-414.
31. Duffie, D., and D. Lando. 2001. Term structure of credit spreads with incomplete accounting information. Econometrica 69 (3): 633-64.
32. Dye, R. A. 1993. Auditing standards, legal liability, and auditor wealth. Journal of Political Economy 101 (5): 887-914.
33. Easley, D., and M. O'Hara. 2004. Information and the cost of capital. The Journal of Finance 59 (4): 1553-83.
34. Edwards, A. K., L. E. Harris, and M. S. Piwowar. 2007. Corporate bond market transaction costs and transparency. The Journal of Finance 62: 1421-51.
35. Elliott, R. K., and P. D. Jacobson. 1998. In search of solutions: SEC independence concepts. The CPA Journal 68 (4): 14-20.
36. Elton, E. J., M. J. Gruber, D. Agrawal, and C. Mann. 2001. Explaining the rate spread on corporate bonds. The Journal of Finance 56 (1): 247-77.
37. Fama, E. F. 1985. What's different about banks? Journal of Monetary Economics 15 (1): 29-40.
38. Federal Reserve. 2007. H15 Selected interest rates, http://www. federalreserve.gov/RELEASES/h15/data.htm.
39. Feltham, G. A., J. S. Hughes, and D. A. Simunic. 1991. Empirical assessment of the impact of auditor quality on the valuation of new issues. Journal of Accounting and Economics 14 (4): 375-99.
40. Fenn, G. W. 2000. Speed of issuance and the adequacy of disclosure in the 144A high-yield debt market. Journal of Financial Economics 56 (3): 383-405.
41. Femado, C. S., V. A. Gatchev, and P. A. Spindt. 2003. Wanna dance? How firms and underwriters choose each other. Working paper, Tulane University.
42. Fortin, S., and J. A. Pittman. 2004. Auditor choice and the pricing of initial public debt issues. Working paper, Memorial University of Newfoundland.
43. Francis, J. R. 2004. What do we know about audit quality? British Accounting Review 36 (4): 345-68.
44. Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2005. The market pricing of accruals quality. Journal of Accounting and Economics 39 (2): 295-327.
45. Francis, J. R., E. L. Maydew, and H. C. Sparks. 1999. The role of Big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice & Theory 18 (2): 17-34.
46. Francis, J. R., and E. R. Wilson. 1988. Auditor changes: A joint test of theories relating to agency costs and auditor differentiation. The Accounting Review 63 (4): 663-83.
47. Gande, A., M. Puri, A. Saunders, and I. Walter. 1997. Bank underwriting of debt securities: Modern evidence. Review of Financial Studies 10 (4): 1175-202.
48. General Accounting Office (GAO). 2003. Required study on the potential effects of mandatory audit firm rotation: Report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, http://www.gao.gov/cgi-bin/getrpt/GAO-04-216.
49. Ghosh, A., and D. Moon. 2005. Auditor tenure and perceptions of audit quality. The Accounting Review 80 (2): 585-612.
50. Graham, J. R., C. R. Harvey, and S. Rajgopal. 2005. The economic implications of corporate financial reporting. Journal of Accounting and Economics 40 (1-3): 3-73.
51. Grossman, S., and O. Hart. 1980. Takeover bids, the free-rider problem and the theory of the corporation. Bell Journal of Economics 11 (1): 42-64.
52. Guedhami, O., and J. A. Pittman. 2006. Ownership concentration in privatized firms: The role of disclosure standards, auditor choice, and auditing infrastructure. Journal of Accounting Research 44 (5): 889-929.
53. Healy, P. M., and K. G. Palepu. 2001. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 (1-3): 405-40.
54. Heckman, J. J. 1979. Sample selection bias as a specification error. Econometrica 47 (1): 153-61.
55. Imhoff, E. A., Jr. 2003. Accounting quality, auditing, and corporate governance. Accounting Horizons 17 (Supplement): 117-28.
56. Jensen, M. C., and W. H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3 (4): 305-60.
57. Johnson, V. E., I. K. Khurana, and J. K. Reynolds. 2002. Audit-firm tenure and the quality of financial reports. Contemporary Accounting Research 19 (4): 637-60.
58. Johnson, W., and T. Lys. 1990. The market for audit services: Evidence from voluntary auditor changes. Journal of Accounting and Economics 12 (1-3): 281-308.
59. Johnstone, K. 2000. Client-acceptance decisions: Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation. Auditing: A Journal of Practice & Theory 19 (1): 1-25.
60. Johnstone, K. M., M. H. Hutton, and T. D. Warfield. 2001. Antecedents and consequences of independence risk: Framework for analysis. Accounting Horizons 15 (3): 193-228.
61. Jorion, P., Z. Liu, and C. Shi. 2005. Informational effects of regulation FD: Evidence from rating agencies. Journal of Financial Economics 76 (2): 309-30.
62. Kim, J.-B., D. A. Simunic, M. T. Stein, and C. H. Cheong. 2005. Voluntary audit and the cost of debt capital for privately held firms: Korean evidence. Working paper, Hong Kong Polytechnic University.
63. Kinney, W. 1988. Attestation research opportunities: 1987. Contemporary Accounting Research 4 (2): 416-25.
64. Lai, K.-W. 2004. A re-examination of the pricing of litigation risk in audit fees: Evidence from U.S. publicly held firms. Working paper, City University of Hong Kong.
65. Leftwich, R. 1983. Accounting information and private markets: Evidence from private lending agreements. The Accounting Review 58 (1): 23-42.
66. Lennox, C. 2005. Management ownership and audit firm size. Contemporary Accounting Research 22 (1): 205-27.
67. Leuz, C., and R. Verrecchia. 2004. Firm's capital allocation choices, information quality, and the cost of capital. Working paper, University of Pennsylvania, The Wharton School.
68. Livingston, M., and L. Zhou. 2002. The impact of Rule 144A debt offerings upon bond yields and underwriter fees. Financial Management 31 (4): 5-27.
69. Loughran, T., and J. R. Ritter. 2004. Why has IPO underpricing changed over time? Financial Management 33 (3): 5-37.
70. Mansi, S. A., W. Maxwell, and D. P. Miller. 2004. Does auditor quality and tenure matter to investors? Evidence from the bond market. Journal of Accounting Research 42 (4): 755-93.
71. Menon, K., and D. D. Williams. 1994. The insurance hypothesis and market prices. The Accounting Review 69 (2): 327-42.
72. Morgan, D. P. 2002. Rating banks: Risk and uncertainty in an opaque industry. American Economic Review 92 (4): 874-88.
73. Myers, J., L. Myers, and T. Omer. 2003. "Exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation?" The Accounting Review 78 (3): 779-99.
74. Myers, J., L. Myers, Z.-V. Palmrose, and S. Scholz. 2005. The length of auditor-client relationships and financial statement restatements. Working paper, Texas A&M University.
75. Ohlson, J. 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 18 (1): 109-31.
76. O'Keefe, T., R. King, and K. Gaver. 1994. Audit fees, industry specialization, and compliance with GAAS reporting standards. Auditing: A Journal of Practice & Theory 13 (2): 41-55.
77. Pagano, M., F. Panetta, and L. Zingales. 1998. Why do companies go public? An empirical analysis. The Journal of Finance 53 (1): 27-64.
78. Palmrose, Z.-V. 1986. Audit fees and auditor size: Further evidence. Journal of Accounting Research 24 (1): 97-110.
79. Palmrose, Z.-V. 1997. Who got sued? Journal of Accountancy 183 (3): 67-9.
80. Petersen, M. A., and R. G. Rajan. 1994. The benefits of lending relationships: Evidence from small business data. The Journal of Finance 49 (1): 3-37.
81. Pinches, G., and J. Singleton. 1978. The adjustment of stock prices to bond rating changes. The Journal of Finance 33 (1): 29-44.
82. Pittman, J. A., and S. Fortin. 2004. Auditor choice and the cost of debt capital for newly public firms. Journal of Accounting and Economics 37 (1): 113-36.
83. Puhani, P. 2000. The Heckman correction for sample selection and its critique. Journal of Economic Surveys 14 (1): 53-68.
84. Reynolds, J., and J. Francis. 2000. Does size matter? The influence of large clients on office level reporting decisions. Journal of Accounting and Economics 30 (3): 375-400.
85. St. Pierre, K., and J. A. Anderson. 1984. An analysis of the factors associated with lawsuits against public accounts. The Accounting Review 59 (2): 242-63.
86. Santos, J. A. C. 2003. Why firm access to the bond market differs over the business cycle: A theory and some evidence. Working paper, Federal Reserve Bank of New York.
87. Securities and Exchange Commission (SEC). 2000. Hearing on auditor independence. Washington, DC: Government Printing Office.
88. Seetharaman, A., F. Gul, and S. Lynn. 2002. Litigation risk and audit fees: Evidence from U.K. firms cross-listed on U.S. market. Journal of Accounting and Economics 33 (1): 91-115.
89. Sengupta, P. 1998. Corporate disclosure and the cost of debt. The Accounting Review 73 (4): 459-74.
90. Smith, C. 1986. Investment banking and the capital acquisition process. Journal of Financial Economics 15 (1-2): 3-29.
91. Smith, C. W., and J. B. Warner. 1979. On financial contracts and optimal capital structure: An analysis of bond covenants. Journal of Financial Economics 7 (2): 117-61.
92. Sweeney, A. 1994. Debt covenant violations and managers' responses. Journal of Accounting and Economics 17 (3): 281-308.
93. Teoh, S. H., I. Welch, and T. J. Wong. 1998. Earnings management and the underperformance of seasoned equity offerings. Journal of Financial Economics 50 (1): 63-99.
94. Teoh, S. H., T. J. Wong, and G. Rao. 1998. Are accruals during initial public offerings opportunistic? Review of Accounting Studies 3 (1-2): 175-208.
95. Turner, L. E. 1999. Call for academic research on key accounting issues. http://www.sec.gov/news/extra/aaacall.htm.
96. Watts, R. L., and J. L. Zimmerman. 1986. Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall.
97. Weber, J., and M. Willenborg. 2003. Do expert informational intermediaries add value? Evidence from auditors in microcap initial public offerings. Journal of Accounting Research 41 (4): 681-720.
98. Willenborg, M. 1999. Empirical analysis of the economic demand for auditing in the initial public offering market. Journal of Accounting Research 37 (1): 225-38.
99. Yu, F. 2005. Accounting transparency and the term structure of credit spreads. Journal of Financial Economics 75 (1): 53-84.