Audit Quality, Timely Disclosure, and the Cost of Debt: Tunisian Evidence

Abstract

The aim of this study is to investigate the effect of auditor type and earnings reporting lag on the cost of debt for the Tunisian setting. Our sample consists of 32 Tunisian companies for the period of 2003-2012. Audit quality is measured by auditor size (Big 4 versus non-Big 4) and timely disclosure is proxied by earnings reporting lag.Results show that auditor type is negatively associated with the cost of debt. By contrast, the association between earnings announcement lag and the cost of debt is positive and significant. When testing for the moderating effects of industry and listing status, we document that these associations are more pronounced for industrial companies and listed firms. Finally, the period of investigation slightly moderates the examined associations, since financial institutions become more sensitive to the tardy communication of information and less concerned with auditor type following some economic and political troubles in Tunisia between 2010 and 2012. Our findings have policy implications for managers in the Tunisian setting and other developing economies similar to Tunisia given the crucial role played by debt as an important source of external finance for companies.

Corporate Governance Practices and Audit Quality: Do They Matter for the Cost of Debt?

“…Table 1 exhibits the corporate governance traits and the audit quality. It reports that director board characteristics and ownership structure of Tunisian listed companies are consistent with those reported in previous studies [42] and [43], and the recommendation of the good behavior and governance report [46]. Specially, the mean value of the board size is around 8.7 and that 75% of the director member are independent.…”

“…Indeed, in debt economy, financial institutions need to rely on alternative information sources, when assessing the borrowing firms' credit risk and monitoring debt contracts. This, in turn, implies less information uncertainty and debt monitoring costs faced by banks and thus lower cost of debt[43].…”

“…cost of debt measured by the interest expense for firm i and year t divided by the short-term and long-term debts at the beginning of year t for firm i[1] and[43].BSIZE: the board size. It represents the Number of director on the board.…”