Do Lenders Have Favorite Auditors?

• In Event: Auditor Choice

Abstract

Yes. We construct a novel revealed preference measure of financial statement verification based on matching among lenders, borrowers, and auditors. When borrowers use their lenders’ preferred auditors, they borrow larger amounts and at lower rates and contracts depend more on accounting information. Lender preferences are determined by their historical experience with individual auditors; when borrowers in their loan portfolio default or restate their financials, lenders shift their loan portfolio away from the implicated auditor. These preferences impact borrowers’ post-financing auditor choices as well as subsequent matching between borrowers and lenders. Finally, when borrowers follow their lenders’ preferences, loan terms are more sensitive to financials and borrowers are less likely to default in the future. Our findings suggest that, through financial statement verification, auditors play a significant role in contracting efficiency and matching in the private loan market.

Authors

• Andrew Bird, Carnegie Mellon University

• Thomas Ruchti, Carnegie Mellon University

• Stephen Adam Karolyi, Carnegie Mellon University