Stefan Sundgren

Larger Board Size and Decreasing Firm Value in Small Firms

Abstract Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.

Determinants of Auditor Choice: Evidence from a Small Client Market

This paper analyzes the auditor choices for a sample of 2,333 predominantly small and mid-sized Finnish firms. Finland requires virtually all commercial enterprises to have a financial statement audit, but allows the smallest firms to choose from four types of audit firms: first tier international firms, first tier national firms, second tier local auditors and non-certified auditors. We find that among the smallest firms, the choice to hire a certified auditor relates to the level of complexity in the organization as measured by size and extent of workforce. For firms that must use a certified auditor, we find that the choice between a first tier and second tier firm is related to size, the extent of debt financing, and complexity associated with being a member of an associated group. Finally, in the upper end of the market, the decision to hire a large international firm relates to size, the need for financing, be it equity or debt, and complexity due to a broad labour force. This pattern is interesting because it indicates that the need for a higher quality auditor is driven first by complexity, then as the firm grows, it is supplemented by the use of debt financing and ultimately by the need to raise equity as well as debt financing.

Auditor-in-Charge Characteristics and Going-concern Reporting

We examine the effect of auditor-in-charge characteristics on audit quality using the propensity to issue a going-concern opinion as the measure of audit quality. We extend the sparse literature on ...

Secured debt and the likelihood of reorganization

Theory suggests that secured creditors may increasingly oppose a debtors reorganization as the value of their collateral approaches the amount of their claims. If reorganization occurs and the val ...

Does a Reorganization Law Improve the Efficiency of the Insolvency Law? The Finnish Experience

This paper provides empirical evidence on issues related to the role of reorganizations. The results show that creditors receive a better payoff in a reorganization than in a going concern sale in liquidation bankruptcy. The study finds support for one explanation, namely that the direct costs of a reorganization are lower than the costs of liquidation bankruptcy. However, direct costs can explain only a part of the reorganization surplus, since the reorganization surplus is much higher than the difference in direct costs.

Auditor choices and auditor reporting practices: evidence from Finnish small firms

This paper examines the links between the likelihood of a modified audit report and the professional qualifications of the auditor for a sample of small and medium-sized firms. Like Denmark, Germany and Sweden, Finland has a two-tier system for qualifications. The data show that modified audit reports are more common in unprofitable, leveraged and failing firms, but there are no significant differences in the propensity to modify the report between auditors with the higher and lower professional qualification. However, it is found that non-professional auditors, i.e. auditors assumed to meet only general eligibility criteria specified by law, are less likely to modify the report. Finnish auditing laws stipulate that all companies must be audited. However, the company must be audited by a professional auditor only if the business exceeds a certain size. Therefore the paper continues with a study of factors related to the decision to engage a professional auditor, although the law does not require firms to do so. Results show that failing firms are significantly less likely to be audited by professional auditors than non-failing firms.

Audit office size, audit quality and audit pricing: evidence from small- and medium-sized enterprises

Using Swedish data, we investigate how audit quality and audit pricing vary with audit firm and office size. In contrast to prior studies, we use disciplinary sanctions issued against auditors not meeting the quality requirement as the measure of audit quality. We find no significant differences in the likelihood of sanctions between Big 4 audit firms and the fifth and sixth largest audit firms in Sweden (Grant Thornton and BDO). We refer to these collectively as ‘Top 6’. However, we find that the probabilities of warnings or exclusions from the profession are much higher for non-Top 6 auditors in Sweden than for Top 6 auditors. Furthermore, we find a strong negative association between the likelihood of sanctions and audit office size for non-Top 6 auditors. This association is insignificant for Top 6 audit firms. Audit fees follow a similar pattern and indicate that larger audit firms and offices put in more effort or have greater expertise. These results suggest that audit quality is differentiated in the private segment market. However, contrary to prior studies, our results suggest that the important dimensions are Top 6 versus non-Top 6 and the office size of non-Top 6 audit firms.

Are Modified Audit Opinions Related to the Availability of Credit? Evidence from Finnish SMEs

We study the association between credit availability and modified audit opinions using a sample of more than 50,000 observations for small- and medium-sized companies. Studies in finance suggest that companies use trade-credit as a source of financing when institutional debt is not available (e.g. Petersen and Rajan, 1994; Danielsson and Scott, 2004). Building on these studies, we study whether modified audit opinions are associated with an increased use of trade credit relative to bank debt. We find no association between modified audit opinions and our measure of credit rationing. Our archival evidence focusing on SMEs is contrary to much of the earlier research finding that modified audit opinions provide incremental information for lenders. Our study adds to the scarce literature on the role of audit reports as a source of information in SME finance.

On the Design of Efficient Priority Rules for Secured Creditors: Empirical Evidence from A Change in Law

This article assesses the effect of a reduction in secured creditor priority on distributions and administrative costs in liquidating bankruptcy cases by reporting the first empirical study of the effect of a priority change. Priority reform had redistributive effects in liquidating bankruptcy. As expected, average payments to general unsecured creditors were significantly higher after the reform than before the reform and payments to secured creditors decreased. Reform did not increase the size of the pie to be distributed in bankruptcy. Nor did it increase the direct costs of bankruptcy.

Determinants of internal governance quality: evidence from Sweden

Purpose – The purpose of this paper is to assess whether ownership concentration, leverage and demand for equity financing is associated with internal corporate governance quality. The paper focuse ...