Abstract
This paper sheds light on the effect of corporate governance practices and audit quality on the cost of debt. Particularly, we investigate the effect of the ownership structure and the audit committee independance, as well as the reputation of the external auditor, on the cost of debt. Based on a sample of Tunisian listed companies over the period 2007 to 2016 and using OLS regression models estimated with robust standard errors, our findings show that the cost of debt is inversely related to the director board size and the ownership concentration. Tunisian debtholders favour monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness and the presence of blockholders as a source of greater assurance. The results also reveal evidence of a debt pricing effect of audit quality as measured by auditor size (Big4). The findings report, however, that the board composition and the presence of managerial shareholders, as well as the independence of audit committee have non-significant effect on the cost of debt.
Highlights
The agency theory attests that the lenders may support a double risk linked to the shareholders expropriation behavior and the misappropriation by the company of a part of the investment earnings
Banks and other debtholders suppose that the financial information is more reliable for BIG4 clients in comparison with other companies
They attest that the external audit quality can be an effective control mechanism to monitor the managers and guarantee the integrity of financial reports
Summary
The agency theory attests that the lenders may support a double risk linked to the shareholders expropriation behavior and the misappropriation by the company of a part of the investment earnings. Quality auditors may play an important role in mitigating information asymmetry between management and creditors through an increased credibility of financial information [12] This implies less information uncertainty and debt monitoring costs faced by banks and lower cost of debt. We investigate the effect of corporate governance features such as board of directors characteristics and ownership types, and the relevance of financial information resulting from the use of qualified auditor and the independence of audit com-. We examine the corporate governance/cost debt link in emerging market such Tunisian setting where financial institutions play a critical role in financing firms’ activities and where audit quality substitutes for conventional corporate control mechanisms such as boards of directors.
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