The Effect of Auditor Quality on Financing Decisions

Higher quality audit can reduce information asymmetry and restrain the management's opportunistic behavior. However, the sensitivity of the information asymmetry on equity financing and debt financing is different. The two types of wealth providers have different degrees of dependence on external audit. Therefore, audit quality may affect the choice of the ways of corporate finance. Trade-off theory shows that the adjustment of the debt-to-equity ratio and the gap between real debt-to-equity ratio and expected debt-to-equity ratio are significantly related, so this article is based on the trade-off theory to test the effect of auditor quality on corporate financing behaviors. Based on the data from 2009 to 2014 in Shanghai and Shenzhen stock exchange, we use multiple linear regression and probit model to investigate the impact of auditor quality on the financing behavior of sample companies with firm size as the auditor quality substitution variables. We found that the companies which choose the higher quality auditors are more likely conduct equity fmancing. Due to the particularity of China, the state-owned equity of enterprises has few influences from financing constraints. And the results show that state-owned equity has weakened the relationship between the auditor quality and the financing behavior.