The role of auditor choice in debt pricing in private firms

We examine the role of auditor choice in debt pricing in private firms. Because both Moody's and Standard & Poor's comprehensively rate 144A bond issues made by private firms, we can isolate the importance of the information and insurance motives for hiring a Big 4 auditor. After controlling for other determinants and nonrandom selection of external auditors, we fail to find that the presence of a Big 4 auditor affects the yield spreads or credit ratings on these securities. This implies that auditor choice does not influence either the perceptions of credit-rating agencies about the credibility of issuers' financial statements or the perceptions of bondholders about implicit insurance coverage against future losses stemming from audit failure. Consistent with Chaney, Jeter, and Shivakumar's 2004 finding that private firms do not pay more for Big 4 audits, our evidence suggests that private firms with Big 4 auditors do not benefit from lower borrowing costs. Similarly, additional tests reveal that auditor tenure does not explain debt pricing in private firms. © CAAA.