Publication Type

Journal Article

Publication Date

9-2011

Abstract

The authors empirically test the certification hypothesis by studying the roles of reputableauditors and bank underwriters in the design of bond contracts. The certification hypoth-esis suggests that reputable capital market intermediaries can credibly communicate insideinformation to outside investors, thereby helping improve financing terms for firms thatraise external funding. Consistent with this hypothesis, the authors provide evidence thatreputable auditors and underwriters help corporate bond issuers obtain lower bond yields.The effect of reputable auditors on the yields is greater than that of reputable underwritersin terms of economic magnitude and significance, consistent with auditors’ multiple roles asinformation intermediaries, monitors, and insurance providers. The authors also find thatthe presence of reputable auditors and underwriters affects bonds’ nonpricing terms. Firmsthat hire reputable auditors obtain longer term bonds, whereas those that engage reputableunderwriters can issue larger bonds. Taken together, the results suggest that reputableauditors and underwriters have integral, but different, roles in the bond-issuing process.

Keywords

Reputable auditor, reputable underwriter, bond terms, certification hypothesis

Discipline

Accounting | Business Administration, Management, and Operations

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Journal of Accounting, Auditing and Finance

Volume

28

Issue

1

First Page

20

Last Page

52

ISSN

0148-558X

Identifier

10.1177/0148558X11421673

Publisher

SAGE Publications (UK and US)

Copyright Owner and License

SAGE

Additional URL

https://doi.org/10.1177/0148558X11421673

Download

Share

COinS