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Affiliation of local audit firms with Big4 auditors and capital structure : evidence from Indonesia

(2020) MANAGERIAL AUDITING JOURNAL. 35(6). p.731-757
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Abstract
Purpose: This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing emerging country that is characterized by high information asymmetry and low litigation risk. A unique characteristic of the Indonesian audit environment is that Big4 auditors can only enter the market indirectly through affiliation with a local audit firm. Design/methodology/approach: A sample of Indonesian listed companies between 2008 and 2015 is used to investigate this relation using ordinary least squares (OLS). To address the concern that the choice for Big4-affiliated auditors might reflect client characteristics, the authors also perform OLS on a matched sample, using both propensity-score and entropy-balance matching. Findings: Across all three samples, the authors document that companies audited by a Big4-affiliated local audit firm display lower debt ratios. The authors find no such effect for affiliation with second-tier audit firms. Surprisingly, they find that the negative effect of Big4 affiliation is increasing in client size. Research limitations/implications: This study provides evidence of the consequences of hiring Big4 auditors on the perceived information asymmetry by financial markets under extreme conditions: in an environment characterized by low litigation risk and where Big4 auditors can operate only indirectly through affiliation. Practical implications: The results of this study are of interest to policymakers, managers and financial stakeholders in emerging countries where external financing is important yet difficult to obtain because of severe information asymmetry. Hiring a Big4 auditor, even only through affiliation, might reduce perceived information asymmetry and increase the access to external equity financing. Originality/value: To the best of the authors' knowledge, this study is the first to provide evidence of the effect of Big4 auditors on their clients' capital structure when they can operate only indirectly through affiliation with a local auditor.
Keywords
Capital structure, Emerging markets, Big4 audit firms, EARNINGS MANAGEMENT, CORPORATE GOVERNANCE, STRUCTURE DECISIONS, ANALYST COVERAGE, LITIGATION RISK, QUALITY, INFORMATION, OWNERSHIP, MARKETS, CHOICE

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Citation

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MLA
Kurniawati, Heny, et al. “Affiliation of Local Audit Firms with Big4 Auditors and Capital Structure : Evidence from Indonesia.” MANAGERIAL AUDITING JOURNAL, vol. 35, no. 6, 2020, pp. 731–57, doi:10.1108/MAJ-05-2019-2291.
APA
Kurniawati, H., Van Cauwenberge, P., & Vander Bauwhede, H. (2020). Affiliation of local audit firms with Big4 auditors and capital structure : evidence from Indonesia. MANAGERIAL AUDITING JOURNAL, 35(6), 731–757. https://doi.org/10.1108/MAJ-05-2019-2291
Chicago author-date
Kurniawati, Heny, Philippe Van Cauwenberge, and Heidi Vander Bauwhede. 2020. “Affiliation of Local Audit Firms with Big4 Auditors and Capital Structure : Evidence from Indonesia.” MANAGERIAL AUDITING JOURNAL 35 (6): 731–57. https://doi.org/10.1108/MAJ-05-2019-2291.
Chicago author-date (all authors)
Kurniawati, Heny, Philippe Van Cauwenberge, and Heidi Vander Bauwhede. 2020. “Affiliation of Local Audit Firms with Big4 Auditors and Capital Structure : Evidence from Indonesia.” MANAGERIAL AUDITING JOURNAL 35 (6): 731–757. doi:10.1108/MAJ-05-2019-2291.
Vancouver
1.
Kurniawati H, Van Cauwenberge P, Vander Bauwhede H. Affiliation of local audit firms with Big4 auditors and capital structure : evidence from Indonesia. MANAGERIAL AUDITING JOURNAL. 2020;35(6):731–57.
IEEE
[1]
H. Kurniawati, P. Van Cauwenberge, and H. Vander Bauwhede, “Affiliation of local audit firms with Big4 auditors and capital structure : evidence from Indonesia,” MANAGERIAL AUDITING JOURNAL, vol. 35, no. 6, pp. 731–757, 2020.
@article{8647812,
  abstract     = {{Purpose: This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing emerging country that is characterized by high information asymmetry and low litigation risk. A unique characteristic of the Indonesian audit environment is that Big4 auditors can only enter the market indirectly through affiliation with a local audit firm.

Design/methodology/approach: A sample of Indonesian listed companies between 2008 and 2015 is used to investigate this relation using ordinary least squares (OLS). To address the concern that the choice for Big4-affiliated auditors might reflect client characteristics, the authors also perform OLS on a matched sample, using both propensity-score and entropy-balance matching.

Findings: Across all three samples, the authors document that companies audited by a Big4-affiliated local audit firm display lower debt ratios. The authors find no such effect for affiliation with second-tier audit firms. Surprisingly, they find that the negative effect of Big4 affiliation is increasing in client size.

Research limitations/implications: This study provides evidence of the consequences of hiring Big4 auditors on the perceived information asymmetry by financial markets under extreme conditions: in an environment characterized by low litigation risk and where Big4 auditors can operate only indirectly through affiliation.

Practical implications: The results of this study are of interest to policymakers, managers and financial stakeholders in emerging countries where external financing is important yet difficult to obtain because of severe information asymmetry. Hiring a Big4 auditor, even only through affiliation, might reduce perceived information asymmetry and increase the access to external equity financing.

Originality/value: To the best of the authors' knowledge, this study is the first to provide evidence of the effect of Big4 auditors on their clients' capital structure when they can operate only indirectly through affiliation with a local auditor.}},
  author       = {{Kurniawati, Heny and Van Cauwenberge, Philippe and Vander Bauwhede, Heidi}},
  issn         = {{0268-6902}},
  journal      = {{MANAGERIAL AUDITING JOURNAL}},
  keywords     = {{Capital structure,Emerging markets,Big4 audit firms,EARNINGS MANAGEMENT,CORPORATE GOVERNANCE,STRUCTURE DECISIONS,ANALYST COVERAGE,LITIGATION RISK,QUALITY,INFORMATION,OWNERSHIP,MARKETS,CHOICE}},
  language     = {{eng}},
  number       = {{6}},
  pages        = {{731--757}},
  title        = {{Affiliation of local audit firms with Big4 auditors and capital structure : evidence from Indonesia}},
  url          = {{http://dx.doi.org/10.1108/MAJ-05-2019-2291}},
  volume       = {{35}},
  year         = {{2020}},
}

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