Auditor choice and the cost of debt capital for newly public firms

Abstract: We examine the impact of auditor choice on debt pricing in firms ’ early public years when they particularly rely on obtaining external financing despite experiencing serious information problems. Our cross-sectional evidence suggests that retaining a Big Six auditor, which can reduce debt-related monitoring costs by enhancing the credibility of financial statements, enables young firms to lower their borrowing costs. Extant research implies that information asymmetry between borrowers and lenders is decreasing in firm age since young firms have only fledgling reputations in the capital markets. We provide evidence consistent with our prediction that choosing a Big Six auditor decreasingly affects firms ’ interest rates over time. We also report evidence supporting our prediction that this time-series variation is primarily isolated in firms with short private histories, which have even worse information problems in their early public years. Overall, our research suggests that the economic value of auditor reputation declines with age as borrowers gradually shift toward depending on their own reputations to moderate costly information asymmetry