The Effect of Auditor Choice on Financing Decisions

Abstract

We provide evidence that the financing decisions of companies that are audited by a Big Six auditor are less affected by information asymmetry. Specifically, these companies enjoy greater financial flexibility and depend less on favorable market conditions for their equity issuance decisions than those not audited by a Big Six firm. As a consequence, their debt ratios are less affected either by their past stock price performance or by Baker and Wurgler's [2002] measure of market timing. In addition, consistent with the idea that these firms are able to issue equity more regularly, we find that these firms have lower target debt ratios. These results are economically significant. They are robust to endogenizing the selection of the auditor and they hold both cross-sectionally and in panel settings.Information asymmetry, Capital Structure, Auditor Quality