The influence of auditor’s opinion and auditor’s reputation on the cost of debt: evidence from private Spanish firmsLa influencia de la opinión de auditorãa y la reputación del auditor en el coste de la deuda: evidencia en las empresas españolas no cotizadas

ABSTRACT

This paper addresses the relevance of auditor’s opinion and auditor’s reputation for the creditors of private companies in an environment of low demand for audit quality. By employing archival data from private Spanish firms, we find that Big-4 auditors’ clients bear a lower cost of debt, showing that the selection of a high-quality auditor is relevant for the creditors of the company. We also demonstrate that the content of audit reports is relevant for creditors, as they require a higher cost of debt from firms that have obtained a qualified audit report. The influence of auditor’s opinion on the cost of debt does not depend on type of auditor, suggesting that Big-4 auditors’ clients benefit from their auditor’s reputation, even when they receive a qualified audit report.

RESUMEN

En este trabajo analizamos la relevancia de la reputación del auditor y de la opinión expresada en el informe de auditoría para los acreedores de las empresas en un entorno de baja demanda de calidad de auditoría. Los resultados obtenidos a partir de una muestra de empresas no cotizadas españolas indican que los clientes de las grandes auditoras soportan un menor coste de deuda, demostrando que la reputación del auditor es relevante para los acreedores de la empresa. Los resultados también muestran la relevancia del contenido del informe de auditoría, dado que las empresas con informe limpio pagan un menor coste de deuda, si bien nuestros resultados indican que esta influencia no depende del tipo de auditor, lo que sugiere que los clientes de las grandes auditoras consiguen beneficiarse de la reputación de éstas aun cuando reciben informes de auditoría con salvedades.

KEYWORDS:

• Auditor’s opinion
• auditor’s reputation
• audit quality
• cost of debt
• private companies

JEL CLASSIFICATION:

• M42
• M41

PALABRAS CLAVE:

• Opinión del auditor
• reputación del auditor
• calidad de auditoría
• coste de la deuda
• empresas no cotizadas

JEL CLASIFICACIÓN:

• M42
• M41

ORCID

Manuel Cano-Rodríguez http://orcid.org/0000-0002-3482-3836

Santiago Sánchez-Alegría http://orcid.org/0000-0003-2039-7597

Pablo Arenas-Torres http://orcid.org/0000-0002-0430-4349

Notes

1. Agency conflicts between agents (managers) and principals (shareholders) are dubbed “Type I” agency problems, and agency problems between two different principals (shareholders and debtholders, for instance) are called “Type II” problems (Prencipe, Bar-Yosef, & Dekker, 2014).

2. Prior to 2007, the contract could be renewed annually.

3. According to the World Bank data, the ratio of domestic credit to the private sector by banks over GDP in Spain for the years of our sample ranged between 0.953 in 2001 and 1.72 in 2009. In USA, in comparison, it ranged between 0.488 in 2000 and 0.598 in 2008. After the financial crisis, this ratio has been reduced for the two countries, but the value in Spain (1.27 for 2014) is still considerably higher than in the USA (0.50 for 2014).

4. We excluded financial companies because they exhibit extreme values in their leverage ratios and because they are under specific regulation and capital requirements.

5. The average influence of auditors’ opinion on the cost of debt is computed as the influence of non-Big-4 auditors’ opinions (α₂) multiplied by the proportion of observations corresponding to non-Big-4 auditors (0.7475), plus the influence of Big-4 auditors’ opinions (α₂ + α₄) multiplied by the proportion of observations corresponding to Big-4 auditors (0.2525).

6. The average influence of auditors’ reputation on the cost of debt is computed as the influence of hiring a Big-4 auditor when the company receives an unqualified opinion (α₃) multiplied by the proportion of observations with an unqualified opinion (0.7316), plus the influence of hiring a Big-4 auditor for companies that received a qualified opinion (α₃ + α₄) multiplied by the proportion of observations with a qualified opinion (0.2684).

7. Although against expectations, some previous papers have also reported a negative influence of leverage on cost of debt (Francis, LaFond, Olsson, & Schipper, 2005; Piot & Missonier-Piera, 2007). Huguet and Gandía (2014) argue that a non-linear relationship between cost of debt and leverage may be the cause of both positive and negative observed relationships.

8. For a review on the use of the Heckman method in accounting and finance and its potential limitations, see Tucker (2010).

9. The inverse Mills ratio is the ratio of the probability density function to the cumulative distribution function.

10. We repeated the analysis, labelling these paragraphs as “going concern” if classified that way by at least one author, and there was no qualitative change in results.

Additional information

Funding

This work was supported by the Ministry of Economy, Innovation and Science of the autonomous Government of Andalucía [06.37.02.30.57 IBP]; Spanish Ministry of Science and Education [ECO2010-22105-C03-03].