Abstract

This study analyzes the effects of audit quality on the association between operatingperformance and costs of debt in the case of non－listed firms. In addition, this study analyzeswhether the impact of audit quality on persistence of earnings is different from the impact ofaudit quality on persistence of cash flows from operations. Through this study we can checkwhether the debt－holder think accrual basis income as a useful performance measure or cashbasis income as a useful performance measure in non－listed firms because audit quality can affectthe reliability of the financial statements. For this purpose, dependent variable as the costs of debtis calculated by borrowing yield spread, and fractional ranks variable and continuous variables ofthe costs of debt were used for analysis after each empirical analysis. Also, future performance ismeasured by net income and cash flows from operations in the financial statements. And auditquality is measured whether auditor is Big 4 or non－Big 4 as usual (e.g. Behn et al. 2008；Fortin and Pittman 2007 etc). Analysis windows are 2005－2009 period, and sufficient sample of34,431 firms－year is used for data analysis. Empirical results are as follows. First, even after controlling for firm characteristics, negativeassociation between earnings and costs of debt is enhanced significantly more in the case of nonlistedfirms auditing from Big 4 auditors than non－Big 4 auditors. The results show that debtholderconsider audit quality in loan decision making, and that performance which is calculatedaccording to audit quality is reflected in the loan decision making. Thus audit quality of Big 4auditors are evaluated as favourable response in the debt market of non－listed firms. However,the effect of Big 4 auditors do not strengthen the negative association more between operating cash flow and costs of debt. Second, persistence of earnings is higher in non－listed firms auditingfrom Big 4 auditors than in the non－Big 4 auditors. However, in test of persistence of cash flowsfrom operations, the result of fixed effect model between Big 4 auditors and non－Big 4 auditorsis not significantly different. In summary, the results are presented that the debt－holder in the debt market reflect auditquality as alignment of the association between earnings and costs of debt because earnings arerelated with audit quality in non－listed firms. Therefore, this result suggests that accrual basis ofaccounting information is more important as profit performance indicators of non－listed firms inhigh－level reliability of the financial statements. Also, the result of persistence empirical testshows Big 4 auditors contribute the increase of quality of earnings, as well as audit quality impacton association between earnings and costs of debt. These results contribute that it is helpful foraccounting researchers to understand the role of audit quality in non－listed firms, and that providebeneficial implications to managers, investor, accounting standards institute, regulators, and policy－makers for non－listed firms. Researchers who are interested in this area can also apply thediscussion in this paper for the related studies.

Keywords

• Non－listed firms
• Audit quality
• Costs of debt
• Future performance
• Persistence

Related Articles

• Earnings Management Using the Tax Expense, Earnings Persistence, Future Firms Performance, and Firms Value

  Jong-Il Park , shinsangyi

  24(3) 93-145

  Abstract Full Text for PDF

• The Effect of Accounting Conservatism on Credit Ratings and Cost of Debts29) －Empirical Evidence for Listed Firms and Non－listed Firms－

  Sangmin Jung

  18(6) 9-51

  Abstract Full Text for PDF

• The Relation between Corporate Tax Aggressiveness and Future Financial Performance

  Park, Jong-Il

  18(3) 145-182

  Abstract Full Text for PDF

• The Submission of Unaudited Financial Statements to the Securities and Futures Commission and Audit Quality

  Jong-Il Park

  16(6) 135-172

  Abstract Full Text for PDF

• The Effect of Audit Quality of Big 4 Auditors in the Non－listed Market on Avoid Losses and Earnings Decreases

  Jong Il Park

  15(5) 57-95

  Abstract Full Text for PDF