Adults in the room? The auditor and dividends in small firms: Evidence from a natural experiment

TL;DR

This study investigates how the requirement or waiver of auditing affects dividend payouts in small private firms, revealing that avoiding audits leads to higher dividends, likely due to reduced accounting conservatism.

Contribution

It provides causal evidence from a natural experiment that forgoing audits increases dividends in small private firms, highlighting the role of auditing in dividend regulation.

Findings

Avoiding audits increases dividend payouts

Auditing promotes accounting conservatism

Natural experiment confirms causal effect

Abstract

We examine the effect of auditing on dividends in small private firms. We hypothesize that auditing can constrain dividends by way of promoting accounting conservatism. We use register data on private Norwegian firms and random variation induced by the introduction of a policy allowing small private firms to forgo the use of an auditor to estimate the effect of auditing on dividend payout. Identification is obtained by a regression discontinuity around the arbitrary thresholds for the policy. Propensity score matching is used to create a balanced synthetic control. We consistently find that forgoing auditing led to a significant increase in dividends in small private firms.