The Impact of Financial Liberalization, Political Connection and Audit Quality on the Cost of Debt

We study the effect of financial liberalization, political connections, audit quality and the interaction of these factors on the cost of debt using a dataset for Vietnam for the period 2007–2024. Our findings show that firms were able to borrow at a lower cost after financial liberalization due to better access to capital and diversification opportunities. We test how financial liberalization moderates the relationship of auditor quality on the cost of debt and of political connections on the cost of debt. Following financial liberalization, the benefit of engaging a Big 4 auditor in reducing firms’ cost of debt diminishes. Greater transparency and reduced information asymmetry after financial liberalization help offset the need for the Big 4 auditor’s financial report quality certification. Hence, we find that financial liberalization moderates the effect of a Big 4 auditor on the cost of debt. We find that firms with political connections have a lower cost of debt, and this relationship is impacted by financial liberalization. Specifically, as liberalization deepens, the cost of debt declines more for firms with higher levels of political connections. Lastly, politically connected firms do not need to rely on high-quality auditor certification to secure lower borrowing costs due to their easier access to debt from state-owned commercial banks. The political connections moderate the relationship between auditor quality and the cost of debt.