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The cost of debt and the characteristics of audit firms

Title
The cost of debt and the characteristics of audit firms
Authors
Woo Y.-S.Kang M.Lee H.-Y.
Ewha Authors
우용상
SCOPUS Author ID
우용상scopus
Issue Date
2018
Journal Title
Managerial Finance
ISSN
0307-4358JCR Link
Citation
vol. 44, no. 1, pp. 27 - 45
Keywords
Audit firm characteristicsCost of debtDefault risk
Publisher
Emerald Group Publishing Ltd.
Indexed
SCOPUS scopus
Abstract
Purpose: Audit firm bankruptcy can have significant negative impacts on the stock prices of client firms. The purpose of this paper is to identify determinants of audit firm bankruptcy risk as measured by costs of debt. Design/methodology/approach: Using audit firm data publicly available in Korea, this study empirically examines whether client portfolio, financial, and organizational characteristics are associated with the weighted average interest rates assumed by auditors. Findings: The authors find empirical evidence that audit firms’ client portfolio characteristics, including the incidence (or number) of lawsuits against the auditor, the proportion of audit clients under surveillance, the proportion of initial audit engagements, and the proportion of listed companies of audit clients, are positively associated with the cost of debt. The authors also find several financial and organizational characteristics associated with the cost of debt. Practical implications: The findings of this study suggest that client portfolio characteristics as well as financial and organizational characteristics are important determinants of the cost of debt in audit firms, and that these characteristics are different from those of firms in other industries. Identifying the determinants of audit firms’ cost of debt provides insight to regulators, client firms, and capital market participants. Originality/value: This study examines the default risk of audit firms that play an important monitoring role in capital markets. By utilizing unique data about audit firms available in Korea, this study is the first study to empirically examine the effect of detailed audit firm characteristics on audit firm’s default risk. © 2018, © Emerald Publishing Limited.
DOI
10.1108/MF-08-2016-0233
Appears in Collections:
경영대학 > 경영학전공 > Journal papers
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