Auditor Reporting and Corporate Debt Structure

Abstract

This paper examines whether auditor reporting is associated with corporate debt structure. Specifically, it examines whether modified audit opinions are related to debt conversion privilege, which is a significant debt contract term. I hypothesize a positive link between the presence of qualified audit reports and the likelihood of issuing convertible bonds. Modified opinions deliver warning signals about firms’ financial statement quality. Debtholders are likely to demand conversion provision to protect themselves against shareholders-debtholders agency conflicts when lenders seem to have high information asymmetry. The results confirm the hypothesis, demonstrating the economic role of audit reports in debt contract design.