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The Role of Auditor Choice in Debt Pricing in Private Firms *

The Role of Auditor Choice in Debt Pricing in Private Firms * Contemporary Accounting Research Vol. 24 No. 3 (Fall 2007) pp. 859–96 © CAAA doi:10.1506/car.24.3.8 Contemporary Accounting Research of the presence of a Big 4 auditor, along with control variables, on the credit ratings assigned to 144A bonds issued by private firms. In April 1990, the U.S. Securities and Exchange Commission (SEC) began to permit firms to raise capital under rule 144A from qualified institutional buyers. These securities can be traded among these large financial institutions without restriction in the secondary market, but cannot be resold to individual investors. Rule 144A debt issues are technically private placements with much more liquidity than traditional private issues.3 Besides reducing uncertainty about their financial statements, private firms may benefit from Big 4 auditors providing more implicit insurance coverage to investors in the event of audit failure (Dye 1993). Although Mansi et al. (2004) and Fortin and Pittman (2004) find that this insurance protection affects debt pricing in public firms, St. Pierre and Anderson (1984) and Palmrose (1997) report that U.S. auditor litigation seldom involves private firms, implying that any implicit insurance afforded by a Big 4 auditor may be less valuable in these situations. After controlling for the information value of auditor http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

The Role of Auditor Choice in Debt Pricing in Private Firms *

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References (109)

Publisher
Wiley
Copyright
2007 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1506/car.24.3.8
Publisher site
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Abstract

Contemporary Accounting Research Vol. 24 No. 3 (Fall 2007) pp. 859–96 © CAAA doi:10.1506/car.24.3.8 Contemporary Accounting Research of the presence of a Big 4 auditor, along with control variables, on the credit ratings assigned to 144A bonds issued by private firms. In April 1990, the U.S. Securities and Exchange Commission (SEC) began to permit firms to raise capital under rule 144A from qualified institutional buyers. These securities can be traded among these large financial institutions without restriction in the secondary market, but cannot be resold to individual investors. Rule 144A debt issues are technically private placements with much more liquidity than traditional private issues.3 Besides reducing uncertainty about their financial statements, private firms may benefit from Big 4 auditors providing more implicit insurance coverage to investors in the event of audit failure (Dye 1993). Although Mansi et al. (2004) and Fortin and Pittman (2004) find that this insurance protection affects debt pricing in public firms, St. Pierre and Anderson (1984) and Palmrose (1997) report that U.S. auditor litigation seldom involves private firms, implying that any implicit insurance afforded by a Big 4 auditor may be less valuable in these situations. After controlling for the information value of auditor

Journal

Contemporary Accounting Research – Wiley

Published: Sep 1, 2007

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