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Journal of Management & Governance

, Volume 16, Issue 4, pp 683–706 | Cite as

The value of audit quality in public and private companies: evidence from Spain

  • Manuel Cano Rodríguez
  • Santiago Sánchez Alegría
Article

Abstract

This paper compares the value of audit quality, proxied by the selection of a big N auditor, to the external claimholders of private and public companies. Although the combination of a lower ownership concentration of public companies, the greater demand for financial information quality about these companies and their higher litigation risk can result in the expectation that audit quality should be more valuable for public than for private companies, the greater information asymmetry between the managers and the external stakeholders and the unavailability of alternative mechanisms for monitoring the managers can make external audit more valuable for the external claimholders of private companies. In this paper, we test these two competing views by analysing if banks and lenders take into account auditor selection in the formation of the cost of debt. Our results support the second view: we find that only private companies obtain a lower cost of debt when they are audited by a high-quality auditor. These results are robust to both endogeneity and unobserved firm-specific heterogeneity.

Keywords

Audit quality Agency problems Big N auditors Private companies Cost of debt 

Notes

Acknowledgments

This research is funded by the P06-SEJ-01821 research project, of the General Secretary of Universities, Research and Technology of Andalucía and the SEJ2007-65782-C02-02ECON research project of the Spanish Ministry of Science and Education.

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Copyright information

© Springer Science+Business Media, LLC. 2011

Authors and Affiliations

  • Manuel Cano Rodríguez
    • 1
  • Santiago Sánchez Alegría
    • 2
  1. 1.Department of Financial Economics and AccountingUniversity of JaénJaénSpain
  2. 2.Department of Business AdministrationPublic University of Navarra, Edificio Departamental de los MadroñosPamplonaSpain

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