Effect of Internal Control System on Auditor Choice and Credit Rating of KOSDAQ Firms

초록

This study investigates the effect of internal control of the Korea Securities Dealers Automated Quotation (KOSDAQ) firms on auditor choice and credit ratings. Recent Korean studies suggest that the ratio of internal control personnel is negatively associated with the probability of internal control weaknesses and positively associated with financial reporting quality. However, no noteworthy research exists on the relationship among the effect of internal control of KOSDAQ firms, audit choice, and credit ratings. This study offers empirical evidence using a sample of the KOSDAQ firms from 2005 to 2008. Based on a sample of 2,233 KOSDAQ firms, this study finds that the KOSDAQ firms' internal control activities have a positive effect on the auditor choice and credit ratings. This study also finds that the positive effect of external audit quality on the credit ratings is greater than the positive effect of internal control quality. After controlling the sample selection problem by Heckman (1979), this study also reports that the positive effect of external audit quality and internal control quality on firm credit ratings are still robust.

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