The Role of Reputable Auditors and Underwriters in the Design of Bond Contracts
Résumé
We empirically test the certification hypothesis by studying the roles of reputable auditors and bank underwriters in the design of bond contracts. The certification hypothesis suggests that reputable capital market intermediaries can credibly communicate inside information to outside investors, thereby helping improve financing terms for firms that raise external funding. Consistent with this hypothesis, we provide evidence that reputable 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 underwriters in terms of economic magnitude and significance, consistent with auditors' multiple roles as information intermediaries, monitors and insurance providers. We also find that the presence of reputable auditors and underwriters affects bonds' non-pricing terms. Firms that hire reputable auditors obtain longer-term bonds, while those that engage reputable underwriters can issue larger bonds. Taken together, our results suggest that reputable auditors and underwriters have integral, but different, roles in the bond issuing process.