Auditor size, tenure, and bank loan pricing

• Published in: Review of quantitative finance and accounting 2013, Vol.40 (1), p.75-99
• Main Authors: Kim, Jeong-Bon, Song, Byron Yang, Tsui, Judy S. L.
• Format: Article
• Language: English
• Subjects: Accounting/Auditing; Auditing; Auditors; Bank loans; Corporate Finance; Credit; Credit risk; Debt; Econometrics; Economics and Finance; Finance; Interest rates; Operations Research/Decision Theory; Original Research; Participating loans; Pricing; Studies; Tenure; Transaction costs; U.S.A
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-011-0270-z

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.