Mandatory auditor choice and small firm finance: Evidence from Finland

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We study the capital market implications of mandatory auditor choice. This regulatory intervention provides us with an instrument that can be used to examine the role of asymmetric information in the market for small business finance. We propose, in particular, a new exogenous measure of information based on a legal requirement that makes it mandatory for firms above a certain size to use certified auditors. Using a large panel on Finnish (mostly) closely held small businesses we find that despite significant market-driven demand for auditing, the legal requirement forces some firms to use a certified auditor. The cost of debt capital for a small business that is forced to use a certified auditor goes down and its creditworthiness, as measured by a commercial credit rating, improves. These results are consistent with the view that asymmetric information and, in particular, borrower-lender conflict are empirically relevant in the market for small business finance.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ETLA Discussion Papers ; No. 950

Classification and Topics

• Classification: Wirtschaft ; Information and Market Efficiency; Event Studies; Insider Trading ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: auditing ; small business finance ; cost of debt capital ; regression discontinuity ; tilintarkastus ; pk-yritysrahoitus ; vieraan pääoman kustannukset ; Klein- und Mittelunternehmen ; Revision ; Kapitalkosten ; Finnland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hyytinen, Ari ; Väänänen, Lotta
• Event: Veröffentlichung
• (who): The Research Institute of the Finnish Economy (ETLA)
• (where): Helsinki
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/63801