The role of reputable auditors and underwriters in the design of bond contracts

• Main Authors: LOU, Yun, VASVARI, Florin.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Reputable auditor; reputable underwriter; bond terms; certification hypothesis; Accounting; Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/soa_research/1699; https://ink.library.smu.edu.sg/context/soa_research/article/2726/viewcontent/0148558x11421673__1_.pdf
• Institution: Singapore Management University

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.