Acceso usuarios
Ghana
Purpose – Credit Default Swap (CDS) trading alters equilibrium interactive monitoring of external corporate monitors due to a possible change in private lenders’ incentive to monitor client firms. This study explores how audit fees change in response to CDS trade initiation on clientfirms and how this effect is moderated by investor protection.
Design/methodology/approach – With 6,052 cross-country firm observations, the author conducts estimations in the systems dynamic general methods of moments framework.
Findings – The author documents that audit fees rise on average after CDS trade initiations with and/or without investor protection. Meanwhile, change in auditors’risk perception resultin increased audit costs when CDS trade initiation and investor protection interact. The effect of CDS trading on audit fees remain after controlling for firm, audit, and auditor features are robust to different proxies of audit cost.
Practical implications – The need for firms in high investor protection jurisdictions to initiate CDS trade to implement policies in order to maximize their gains from investor protection activities to lessen the overall impact of any increased audit cost that may arise. Furthermore, CDS regulation may be strategically targeted to lessen the effect of increased audit costs on firms after initiation. This would ensure that the resulting increase in audit cost may not materially impact the cash or profitability position of such firms.
Originality/value – This study is distinct from previous ones by focusing on variation in private lenders incentive to monitor after CDS trade initiation after controlling for possible monitoring by short-term creditors.
Given that monitoring is not costless for private lenders and CDS trading on their borrowers causes a change in this cost structure, the author documents how auditors react to such changes in incentive to monitor.
