The Impact of Credit Market Development on Auditor Choice: Evidence from Banking Deregulation

• In Event: Auditor Selection

Abstract

Exploiting the staggered state-level adoption of the Interstate Banking and Branching Efficiency Act (IBBEA), we examine whether and how banking deregulation affects firms’ auditor choices. We find robust evidence that an exogenous increase in the level of banking deregulation leads to a reduction in firms’ propensity to engage Big N or industry expert auditors. In cross-sectional analyses, we further find that the negative effect of banking deregulation on firms’ audit choices is more pronounced among firms with greater external finance dependence, and firms headquartered in the states with fewer sophisticated local banks prior to deregulation and more sophisticated entering banks following deregulation. Such evidence is consistent with two underlying channels through which banking deregulation exerts its effect on firms’ auditor choices, i.e., firms obtaining increased access to bank credit, and firms being subject to strengthened bank monitoring. Our study sheds light on how the U.S. credit market infrastructure shapes firms’ auditor-choice decisions.

Authors

• Yibin Zhou, University of Texas at Dallas

• Gus De Franco, Tulane University

• Yuyan Guan, Nanyang Technological University

• Xindong Zhu, City University of Hong Kong