Authors:

• Riste Ichev, University of Ljubljani, School of Economics and Business
• Jernej Koren, Bank Asset Management Company, Ltd.
• Urska Kosi, Paderborn University, Faculty of Business Administration and Economics
• Katarina Sitar Šuštar, University of Ljubljani, School of Economics and Business
• Aljoša Valentinčič, University of Ljubljani, School of Economics and Business

Keywords:

Private firms | Voluntary audit | Cost of debt | Self-selection bias | Risk

Abstract

We examine the relation between voluntary audit and the cost of debt in private firms. We use a sample of 7420 small private firms operating in the period 2006-2022 that are not subject to mandatory audits. Firms self-select into voluntary audits because of the economic setting (e.g., ownership complexity, export, subsidiary status) or because firm fundamentals limit their access to financial debt. In the outcome analyses, we find that voluntary audits result in higher, rather than lower, interest rates with increases ranging from approximately 1.7 percentage points, but going higher depending on the exact specification. This effect is present regardless of the perceived audit quality (Big-4 vs. non-Big-4), consistent across auditor types. Audited firms’ earnings are less informative about future operating performance. Voluntary audits facilitate access to financial debt for high-risk firms. The price paid is reflected in higher interest rates for voluntary audits – firms with higher information/fundamental risk.

The Sustainable Development Goals (SDGs) addressed in the article are:

• SDG 8 – Decent Work and Economic Growth
• SDG 12 – Responsible Consumption and Production

The article is published in:
International review of economics & finance (ScienceDirect)

The content is freely accessible at:

Cost of debt for private firms revisited: voluntary audits as a reflection of risk