Corporate Governance, Auditor Quality And Capital Structure

Since Modigliani and Miller (1958) discussed the company’s capital structure and the market value of the company, putting forward the famous MM theory, the capital structure of the company has become a core of corporate finance. As an internal governance mechanism, corporate governance has an impact on the capital structure by ways of regulating the behaviors of the directors and managers and coordinating the benefits of stakeholders from all parts. The external audit, as a kind of external governance mechanism, also can affect the enterprise’s financing decision, and thus have an impact on the capital structure through increasing corporate transparency and reducing the cost of financing, or through the supervision of the managers and restrict their behavior.In this paper, we use the data of non-financial firms from 2007-2013 to do the research. We use the long-term debt ratio and the rate of liabilities with interest as an alternative variable of corporate capital structure and use a comprehensive index aggregated by six dummy variables of corporate governance indicators to measure the level of corporate governance. We measure auditor quality by industry specialty and the audit firm scale. We also use the PSM method to solve the problem of self-selection and study the effects of corporate governance and the audit quality on the company’s capital structure. Besides, this paper also tests the effects in the context of different nature of property right and different information environment.From the empirical results, we find that:(1) Corporate governance is positively associated with the capital structure. (2) Auditor quality is negatively associated with the capital structure. (3) In the sample of the companies audited by industry expertise auditors, the impact of corporate governance on the capital structure is offset by the auditor quality. But this result has not been verified while we use the audit firm scale to measure the auditor quality. (4) In the sample of higher level of corporate governance, auditor quality is still negatively associated with the capital structure. But in the sample of lower level of corporate governance, auditor quality has no significant influence on capital structure. (5) Compared to the state-owned enterprises, the impact of corporate governance and auditor quality on the capital structure is not significant any more in the non-state-owned enterprises. (6) In the contexts of different information environment, corporate governance is always positively associated with the capital structure. (7) In the sample of higher degree of information asymmetry, auditor quality has no significant influence on the capital structure. But in the sample of lower degree of information asymmetry, auditor quality is still negatively associated with the capital structure.This paper examines the role of company governance and external auditor on the capital structure, and further explores the relationship between the two. The paper can not only enrich literatures about the relations between the internal and external governance mechanism and the capital structure, but also help us to understand the effect and the way of company’s internal and external governance mechanism on corporate financing and the capital structure.