Auditor size, tenure, and bank loan pricing

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

30 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)75-99
Journal / PublicationReview of Quantitative Finance and Accounting
Volume40
Issue number1
Publication statusPublished - Jan 2013

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. © 2011 Springer Science+Business Media, LLC.

Research Area(s)

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

Citation Format(s)

Auditor size, tenure, and bank loan pricing. / Kim, Jeong-Bon; Song, Byron Yang; Tsui, Judy S.L.

In: Review of Quantitative Finance and Accounting, Vol. 40, No. 1, 01.2013, p. 75-99.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review