Auditor size, tenure, and bank loan pricing

Jeong Bon Kim, Byron Y SONG, Judy S.L. Tsui

    Research output: Contribution to journalJournal articlepeer-review

    41 Citations (Scopus)

    Abstract

    Using a large sample of U. S. bank loan data from 1996 to 2008, we investigate the relation between two auditor characteristics, namely, auditor size and tenure, and loan interest rates. Our results show the following: First, we find that the loan interest rate is significantly lower for borrowers with prestigious Big 4 auditors than for borrowers with non-Big 4 auditors. Second, we find that auditor tenure is negatively associated with the loan interest rate, suggesting that a long client-auditor relationship lowers the loan borrowing cost. Third, we find that the negative association between auditor size and loan rate is more pronounced for transaction-based term loans than for relationship-based revolving loans. Fourth, our sub-period tests show that our results are driven by the post-Sarbanes-Oxley Act period. Our study provides direct evidence that auditor size and tenure are incremental credit risk-reducing factors in the bank loan market.

    Original languageEnglish
    Pages (from-to)75-99
    Number of pages25
    JournalReview of Quantitative Finance and Accounting
    Volume40
    Issue number1
    DOIs
    Publication statusPublished - Jan 2013

    Scopus Subject Areas

    • Accounting
    • Business, Management and Accounting(all)
    • Finance

    User-Defined Keywords

    • Auditor size
    • Auditor tenure
    • Loan pricing
    • Loan rate

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