The information role of audit opinions in debt contracting

Three essays on the effects of foreign direct investment on the host-country companies: An analysis in the private setting

“…Several papers use the likelihood of receiving an MAO as an inverse measure of reporting quality, since the external auditor is precisely a professional in charge of assessing the quality of the financial statements (e.g. : Chen, He, Ma, & Stice, 2016). This approach differs from that used in the second paper.…”

“…Banks are the most important users of financial statements in the private setting, and financial reporting quality is related to loan terms (Armstrong, Guay, & Weber, 2010;Chen, He, Ma, & Stice, 2016;Karjalainen, 2011). The higher the dependence on bank financing the more important the incentives of debt contracting for financial reporting quality.…”

“…In turn, MAOs are prima-facie evidence of poor financial reporting quality (Chen, He, et al, 2016;Karjalainen, 2011) and have negative consequences for the company (Chen, Su, & Zhao, 2000).…”

“…In Spain, there is also experimental evidence that the audit report is useful in loan rating decisions (Guiral-Contreras et al, 2007;Guiral, Ruiz, & Choi, 2014). Recently, Chen, He, et al (2016) use a large sample of listed Chinese companies and observe that loans granted to companies after receiving an MAO are associated with higher cost of debt and likelihood of requiring collateral, smaller loan size, and shorter maturity.…”

“…On the one hand, MAOs are seen as an indicator of poor financial reporting quality (Chen, He, et al, 2016), since auditors are independent professionals who assess the company's financial reporting quality. In the second paper of this thesis we find that in the setting analyzed, namely private Spanish subsidiaries, foreign shareholders are associated with low financial reporting quality, proxied with earnings management practices through accrual manipulation.…”