Save Money to Lose Money? Implications of Opting Out of a Voluntary Audit Review for a Firm's Cost of Debt*

Vlad-Andrei Porumb*, Yasemin Zengin-Karaibrahimoglu, Shuo Wang, Gerald J. Lobo

*Bijbehorende auteur voor dit werk

OnderzoeksoutputAcademicpeer review

1 Citaat (Scopus)
23 Downloads (Pure)


An audit review (AR) is a mechanism used by boards to assess the quality of interim financial reports on a timely basis. In Canada, the AR is voluntary, with listed firms mandated to disclose when they choose to not purchase additional audit verification. Given the relatively low cost of an AR, opting out of it can be regarded as a negative signal, especially in the context of lenders' sensitivity to downside risk. Using a sample of 7,585 firm-year observations from 1,616 public firms in Canada over the period 2004-2015, we document that firms without a voluntary AR have a higher cost of debt than firms with an AR. Furthermore, after firms opt out of the AR, the increase in the cost of debt is accompanied by a rise in discretionary abnormal accruals and managers' stock-based compensation. Moreover, no-AR firms are more likely to reduce post-switch private borrowing and have lower equity analyst following. Our study is the first to document that although listed borrowers that opt out of an AR have a higher cost of debt financing, they are concurrently able to engage in more earnings management and grant their managers higher stock-based compensation because of lower external monitoring.

Originele taal-2English
Pagina's (van-tot)1207-1232
Aantal pagina's26
TijdschriftEuropean Accounting Review
Nummer van het tijdschrift5
Vroegere onlinedatum23-aug.-2022
StatusPublished - 2022

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