The value of a voluntary audit in debt financing: evidence from small privately held companies

Abstract

This study examines the effects of voluntary audits on the quality of financial information and the cost of debt in small privately held companies using a sample of 5,254 observations spanning 2007-2012. Prior studies [see Blackwell et al. (1998), Minnis (2011) and Kim et al. (2011)] suggest that audited firms have a significantly lower cost of debt. In contrast to prior studies, our archival evidence shows that firms opting for a voluntary audit pay a slightly higher interest rate on their debt than do the unaudited firms among the set examined. This result is however supported by Niemi et al. (2012) who found that having a voluntary audit is positively associated with financial distress and by Dedman et al. (2014) who found that riskier companies are more likely to purchase voluntary audits.