Audit Firm Choice in Italian Private Firms: Effects on Cost of Debt and Earnings Quality

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 12: Debt

Abstract

This study investigates the effect on cost of debt and earnings quality by the choice of the audit firm made by Italian private firms. We examine audit firm choices through audit firm size, international presence, regulation status, and client characteristics. We find that clients of audit firm who are allowed to operate at the European Union level have lower cost of debt and higher earnings quality compared to clients of audit firms that operate only at the Italian level. We also find that clients of audit firms with both private and public clients have lower cost of debt and higher earnings quality compared to clients of audit firms that only have private clients. We conclude that international presence and client characteristics reduce agency conflicts between lenders and owners/manager in private firms.

Authors

• Tatiana Mazza, Free University of Bozen-Bolzano

• Stefano Azzali, University of Parma