Debt maturity and SMEs: Do auditor’s quality and ownership structure matter?

ABSTRACT

This study analyzes the two corporate governance mechanisms that affect the debt maturity structure of small and medium-sized enterprises (SMEs) listed on the Alternative Investment Market (AIM): Big 4 auditors and the firms’ ownership structure. Analyzing 227 listed SMEs (1998–2016) and applying both cross-sectional and panel data estimations, we find that: (a) there is a positive and significant relationship between Big 4 auditors and debt maturity; (b) firms with more ownership concentration have a higher fraction of long-term debt in their capital structure; (c) although family firms are, on average, associated with shorter debt maturities, when they are audited by a Big 4, their debt maturity lengthens.

KEYWORDS:

• Audit quality
• ownership structure
• debt maturity structure
• alternative investment market (aim)

Acknowledgments

We are grateful to Juan Manuel Ramón-Jerónimo and participants of the IV Workshop on SMEs, Entrepreneurship and Family Business (Seville, Spain), European Financial Management Association (Milan, Italy), the 26th FINANCE FORUM (Santander, Spain), and the XXVIII ACEDE Conference (Spanish Academy of Management, Valladolid, Spain) for their constructive comments and suggestions.

Availability of data and material

The data that support the findings of this study are available on request from the corresponding author.

Notes

1 SME financing through capital markets is still very small, with the exception of two pioneer countries, the UK and Canada, which have opened alternative investment markets for SMEs in the last decades. There are from two to 48 listed firms in Latin American, non-OECD countries, and from 14 to 187 listed firms in OECD countries (Briozzo et al., 2019).

2 The Big 4 auditors are KPMG, Deloitte, PricewaterhouseCoopers, and Ernst & Young.

3 Some research supports the contention that strong institutions at country level are a necessary condition for generating differential audit quality at the firm level (Francis & Wang, 2008; El Ghoul et al., 2016a). In contrast, other studies find that the role of Big 4 auditors improving transparency is concentrated in countries with weak legal institutions (Choi et al., 2008; Choi & Wong, 2007; Fan & Wong, 2005; Kim et al., 2011).

4 We acknowledge that Big 4 appointment is only one proxy of auditing quality (being largely a function of the size of the auditee) and other proxies such as qualified audit opinion, going-concerns options, and accruals have been used in the literature (see, for instance, Menon & Williams, 2016), as well as the financial reporting quality (De Meyere et al., 2018).

5 It has been pointed out that when banks know firms well, they can depend less on the external monitoring provided by Big 4 auditors to reduce agency costs (Diamond, 1991; Kim et al., 2011; Rajan & Winton, 1995).

6 Auditor’s quality is thus an alternative tool to short-term debt to reduce internal agency conflicts as well (Chang et al., 2009; Fan & Wong, 2005; Hope et al., 2008).

7 https://www.lseg.com/markets-products-and-services/our-markets/london-stock-exchange/equities-markets/raising-equity-finance/aim/aim-20/aim20-key-statistics.

8 The regulatory structure of the AIM is established by the LSE, independently from the EU Investment Services Directive (Gerakos et al., 2013). LSE delegates oversight of AIM firms to nominated advisors (NOMADS) (Mendoza, 2008). The financial reporting enforcement regime (FRRP) introduced proactive and selective monitoring of published financial statements for UK listed companies, this in turn affecting company financial reporting quality, auditing fees and shareholder wealth (Christesen et al., 2019).

9 We apply the same threshold used by Altman (1968): If the value of the Z score is above 2.99, the company is placed in the “Safe Zone,” being lower the risk that it falls into financial distress.

10 This variable does not vary over time because of the lack of information over the years.

11 We also experimented, in an unreported analysis, by comparing the results before and after the crisis period. Still, we do not find any significant impact of the crisis period on AIM firms’ debt maturity.

Additional information

Funding

This work was supported by the Regional Government of Castilla y Leon [LE103G18] and Spanish Science and Innovation Ministry [MCI-20-PID2019-108503RB-I00].