Internal Control Weaknesses, Family Ownership and the Cost of Debt: Evidence from the Tunisian Stock Exchange

ABSTRACT

This study investigates the effect of internal control weaknesses (ICW) and family ownership on the cost of debt in the Tunisian setting. We document that ICW and family ownership are positively associated with the cost of debt. When testing for the moderating effect of family ownership on the association between ICW and the cost of debt, we document that the positive effect of ICW on the cost of debt is more pronounced under high family ownership in the Tunisian setting. Furthermore, the positive and significant association between ICW and the cost of debt is more prevailing for firms audited by non-Big 4 auditors and industrial companies. These findings may have policy implications for Tunisian policymakers with respect to the establishment of internal control standards.

KEYWORDS:

• ICW
• family ownership
• cost of debt
• Tunisia

Acknowledgements

The authors gratefully acknowledge the helpful comments and suggestions from the two anonymous reviewers and the Editor-in-Chief, Simon P. Sigué, of Journal of African Business.

Notes

1. Examining how ICW affect the cost of debt is more relevant in emerging economies given the fact that their financial markets are less developed and liquid compared to developed ones to provide finance for companies. Therefore, financial institutions will play a pivotal role in financing firm’s activities in these emerging settings.

2. The Code of Commercial Companies have been revised by the law number 2005-65 of July 27, 2005 and the law number 96-2005 of October 18, 2005.

3. All listed Tunisian firms are audited by two auditors.

4. The median of family ownership accounts for 0.552.

5. All models examined do not suffer from multicollinearity problem since all maximum VIFs do exceed 4.080.

6. Karjalainen (2011) examines the effect of audit quality on the cost of debt in Finland.