Auditor quality and loan syndicate structure

This study investigates whether and how the quality of external auditors hired by borrowers has an impact on loan syndicate structure. Our empirical analyses, using a sample of U.S. syndicated loans from 1996 to 2009, show the following findings: First, a larger number of banks participate in syndicated loans to borrowing firms with Big 4 (or previously Big 5 or Big 6) auditors than to those with non-Big 4 auditors. Second, the percentage of a syndicated loan retained by the lead bank(s) is smaller when the borrower is a client of a Big 4 auditor than when the borrower is a client of a non-Big 4 auditor. Third, the effect of auditor quality (Big 4 versus non-Big 4) on loan ownership structure is less pronounced when lenders are able to gather more information about the borrower prior to the loan deal. Overall, our results suggest that auditor quality plays an important role in loan syndication by alleviating information asymmetries between lead banks and non-lead participant banks.