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 are lesser known. Our evidence suggests that retaining a Big Six auditor, which can reduce debt-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. We also provide evidence consistent with our predictions that choosing a Big Six auditor affects firms’ interest rates less over time and particularly benefits firms with short private histories that initially experience worse information problems.