Auditor Quality and Debt Covenants

• 成果类型: Article
• 署名作者: Robin, Ashok; Wu, Qiang; Zhang, Hao
• 署名单位: Rochester Institute of Technology; Rensselaer Polytechnic Institute
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12243
• 发表日期: 2017
• 页码: 154-185
• 关键词: internal control weakness; industry specialization; corporate governance; contracting evidence; FINANCIAL RATIOS; Control rights; firm; selection; AGENCY; COSTS

摘要

This study examines the impact of auditor quality on financial covenants in debt contracts. We conjecture that high-quality auditors have two related effects on these debt covenants: (i) they encourage fewer and less restrictive covenants by providing assurance to lenders at contract inception and, consequently, (ii) they ensure a lower probability of eventual covenant violations. Consistent with the conjectures, we find that auditor quality is negatively associated with the intensity and tightness of financial covenants. Specifically, high-quality auditors are associated with fewer covenants (especially performance covenants) and less binding covenants. Additionally, we find that auditor quality is negatively associated with the likelihood of covenant violations. In an ancillary test, we provide evidence that high-quality auditors mitigate the detrimental effect of covenant violations on the cost of borrowing. Together, these findings highlight the important role of auditors in debt contracting.