The information role of audit opinions in debt contracting

Accounting and Finance

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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The information role of audit opinions in debt contracting. / Chen, Peter F.; He, Shaohua; Ma, Zhiming et al.
In: Journal of Accounting and Economics, Vol. 61, No. 1, 02.2016, p. 121-144.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Chen, PF, He, S, Ma, Z & Stice, D 2016, 'The information role of audit opinions in debt contracting', Journal of Accounting and Economics, vol. 61, no. 1, pp. 121-144. https://doi.org/10.1016/j.jacceco.2015.04.002

APA

Chen, P. F., He, S., Ma, Z., & Stice, D. (2016). The information role of audit opinions in debt contracting. Journal of Accounting and Economics, 61(1), 121-144. https://doi.org/10.1016/j.jacceco.2015.04.002

Vancouver

Chen PF, He S, Ma Z, Stice D. The information role of audit opinions in debt contracting. Journal of Accounting and Economics. 2016 Feb;61(1):121-144. Epub 2015 May 14. doi: 10.1016/j.jacceco.2015.04.002

Author

Chen, Peter F. ; He, Shaohua ; Ma, Zhiming et al. / The information role of audit opinions in debt contracting. In: Journal of Accounting and Economics. 2016 ; Vol. 61, No. 1. pp. 121-144.

Bibtex

@article{d280f389143d48da92fa67b18c244d82,

title = "The information role of audit opinions in debt contracting",

abstract = "This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor׳s explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material uncertainty or a going concern (GC) opinion. Using the loan contracts of firms with MAOs, we find that, compared with loans issued in the year after a clean opinion, loans issued in the year after an MAO are associated with higher interest spreads (17 basis points on average), fewer financial covenants, more general covenants, smaller loan sizes, and a higher likelihood of requiring collateral. We find that the effect on loan spreads (as well as on other non-price terms) varies by the type of MAO, ranging from no effect for an accounting change to an average increase of 107 basis points for a GC opinion. Additional analyses of GC opinions find that auditors communicate incremental information to lenders about clients{\textquoteright} credit risk. Overall, our empirical results suggest that lenders incorporate the information contained in MAOs into debt contracting.",

keywords = "Debt contracting, Audit options, Going concern options, Explanatory language",

author = "Chen, {Peter F.} and Shaohua He and Zhiming Ma and Derrald Stice",

year = "2016",

month = feb,

doi = "10.1016/j.jacceco.2015.04.002",

language = "English",

volume = "61",

pages = "121--144",

journal = "Journal of Accounting and Economics",

issn = "0165-4101",

publisher = "Elsevier",

number = "1",

}

RIS

TY - JOUR

T1 - The information role of audit opinions in debt contracting

AU - Chen, Peter F.

AU - He, Shaohua

AU - Ma, Zhiming

AU - Stice, Derrald

PY - 2016/2

Y1 - 2016/2

N2 - This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor׳s explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material uncertainty or a going concern (GC) opinion. Using the loan contracts of firms with MAOs, we find that, compared with loans issued in the year after a clean opinion, loans issued in the year after an MAO are associated with higher interest spreads (17 basis points on average), fewer financial covenants, more general covenants, smaller loan sizes, and a higher likelihood of requiring collateral. We find that the effect on loan spreads (as well as on other non-price terms) varies by the type of MAO, ranging from no effect for an accounting change to an average increase of 107 basis points for a GC opinion. Additional analyses of GC opinions find that auditors communicate incremental information to lenders about clients’ credit risk. Overall, our empirical results suggest that lenders incorporate the information contained in MAOs into debt contracting.

AB - This study examines the relevance of modified audit opinions (MAO) in private debt contracting. We use the auditor׳s explanatory language to partition MAOs into Inconsistency opinions, resulting from an accounting change or a restatement; and Inadequacy opinions, arising from a material uncertainty or a going concern (GC) opinion. Using the loan contracts of firms with MAOs, we find that, compared with loans issued in the year after a clean opinion, loans issued in the year after an MAO are associated with higher interest spreads (17 basis points on average), fewer financial covenants, more general covenants, smaller loan sizes, and a higher likelihood of requiring collateral. We find that the effect on loan spreads (as well as on other non-price terms) varies by the type of MAO, ranging from no effect for an accounting change to an average increase of 107 basis points for a GC opinion. Additional analyses of GC opinions find that auditors communicate incremental information to lenders about clients’ credit risk. Overall, our empirical results suggest that lenders incorporate the information contained in MAOs into debt contracting.

KW - Debt contracting

KW - Audit options

KW - Going concern options

KW - Explanatory language

U2 - 10.1016/j.jacceco.2015.04.002

DO - 10.1016/j.jacceco.2015.04.002

M3 - Journal article

VL - 61

SP - 121

EP - 144

JO - Journal of Accounting and Economics

JF - Journal of Accounting and Economics

SN - 0165-4101

IS - 1

ER -

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