Audit fees, non-audit fees and access to finance: Evidence from India

Abstract

This paper examines the impact of audit and non-audit fees on firms’ ability to access finance by reducing their capital constraints. Unlike previous studies, which examined this phenomenon in developed economies, this paper focuses on one of the largest, albeit developing, economies in the world: India. India is an interesting empirical setting due to major concerns over the quality of the audit services offered, even by the Big 4 accounting firms. Following the limited attention theory, we argue that, in such settings where the effect of the Big 4 label is limited, capital providers will turn their attention to the fees paid as a more reliable proxy for audit effort. Employing a dataset of listed non-financial Indian firms from 2002 to 2017, we hypothesise and empirically demonstrate that both audit and non-audit fees are negatively associated with firms’ financial constraints. The findings indicate that finance providers see audit and non-audit fees as signals of high-quality audits that enhance the credibility of financial statements and in turn positively impact firms’ access to finance. The results remained unchanged after a battery of robustness tests.