Real effects of the audit choice

Asad Kausar; Nemit Shroff; Hal White

doi:10.1016/j.jacceco.2015.10.001

Real effects of the audit choice

Asad Kausar, Nemit Shroff, Hal White

Accounting

Research output: Contribution to journal › Article › peer-review

139 Scopus citations

Abstract

We hypothesize that the choice to obtain a financial statement audit provides external financiers with incremental information about the firm, which helps reduce information asymmetry and financing frictions. Using a natural experiment, we show that when external financiers observe a firm׳s choice to voluntarily obtain an audit, the firms obtaining an audit significantly increase their debt, investment, and operating performance, and become more responsive to their investment opportunities. Further, we find that these effects are stronger for firms that are financially constrained and weaker for firms with other means to reduce financing frictions. Overall, our evidence suggests that the audit choice conveys information to capital providers, which reduces financing frictions and improves performance.

Original language	English (US)
Pages (from-to)	157-181
Number of pages	25
Journal	Journal of Accounting and Economics
Volume	62
Issue number	1
DOIs	https://doi.org/10.1016/j.jacceco.2015.10.001
State	Published - Aug 1 2016

All Science Journal Classification (ASJC) codes

Accounting
Finance
Economics and Econometrics

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10.1016/j.jacceco.2015.10.001

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abstract = "We hypothesize that the choice to obtain a financial statement audit provides external financiers with incremental information about the firm, which helps reduce information asymmetry and financing frictions. Using a natural experiment, we show that when external financiers observe a firm׳s choice to voluntarily obtain an audit, the firms obtaining an audit significantly increase their debt, investment, and operating performance, and become more responsive to their investment opportunities. Further, we find that these effects are stronger for firms that are financially constrained and weaker for firms with other means to reduce financing frictions. Overall, our evidence suggests that the audit choice conveys information to capital providers, which reduces financing frictions and improves performance.",

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Real effects of the audit choice

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