Audit Profession Development and Bank Loan Contracting

This study examines the relation between country-level audit profession development (APD) and bank loan contracting around the world. Using a sample of bank loan data from 35 countries, we find that stronger APD is associated with more favorable loan terms, such as lower loan spreads, fewer covenant...

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Bibliographic Details
Published in:Auditing : a journal of practice and theory 2021-05, Vol.40 (2), p.85-105
Main Authors: Ge, Wenxia, Kang, Tony, Song, Byron Y., Zhou, Gaoguang
Format: Article
Language:English
Subjects:
Auditing
Auditors
Audits
Bank loans
Loss recognition
Professional development
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Summary:This study examines the relation between country-level audit profession development (APD) and bank loan contracting around the world. Using a sample of bank loan data from 35 countries, we find that stronger APD is associated with more favorable loan terms, such as lower loan spreads, fewer covenants, and larger loan amounts. These effects are stronger in countries with a weaker rule of law. We also find that stronger APD attracts significantly more lenders participating in loans and more foreign lenders leading loans. A breakdown of APD into three subcategories, namely, auditor education, auditor independence and liability, and auditor oversight, reveals that all three influence various contracting terms. We also provide evidence that stronger APD is associated with a higher degree of timely loss recognition. Collectively, our findings show that APD improves bank loan contracting terms. Data Availability: Data are publicly available from the sources mentioned in the manuscript. JEL Classification: F34; K20; M41; M42.
ISSN:0278-0380
1558-7991
DOI:10.2308/AJPT-18-135