Modified audit opinions and debt contracting: evidence from China

Abstract

ABSTRACTWe examine whether the type of audit opinion a company receives is associated with the debt characteristics of Chinese companies. Our analyses indicate that companies receiving modified audit opinions pay higher interest rates and have more short-term debt. When the auditor mentions going concern in the audit opinion, companies pay higher interest rates and have a lower percentage of long-term debt, but this result is weaker for state-owned enterprises. We also find that companies receiving qualified or adverse opinion pay higher interest rates and have a lower level of long-term debt as a percentage of total debt.