Audit Quality and Cost of Debt Capital for Private Firms: Evidence from Finland

The purpose of this paper is to examine the value relevance of the perceived audit quality in terms of who audits, as well as the audit outcomes in terms of the auditor's opinion and accruals quality, in the pricing of debt capital for privately held firms, by examining a large sample of privately held Finnish firms. The findings indicate that Big 4 audits and audits with more than one responsible auditor are associated with a decreased cost of debt capital. Also, firms with modified audit reports and those with lower quality accruals have a higher cost of debt capital. The findings suggest that both the perceived audit quality and audit outcomes are relevant in the pricing of debt capital for privately held firms. Additional analysis suggests that, while the outcomes of an audit are important in the pricing of debt regardless of a firm's size, the perceived audit quality is more important for larger privately held firms.