The More, the Merrier? The Role of an Auditor’s Certification in Loan Pricing

• In Event: Research in Auditing

Abstract

In this paper, we explore the role of the auditor’s certification in loan pricing—the most significant credit term. A highly qualified auditor conveys valuable information to the information disadvantaged lenders about the true quality of the borrower. The literature supports certification effect of reputable auditors in reducing capital costs and recently credits the added value of industry specialization and the auditor’s tenure. When we study the three qualifications together, none of them alone is strong enough to affect the loan interest. But, a Big 4 auditor with tenure can benefit the client in reducing the interest by about 1.98 percent. The more expertise the auditor has, the better value it brings to borrowers. A highly qualified auditor with additional expertise can significantly reduce the loan pricing further by about 2.96 percent. The results are robust to propensity score matching, omitted variable bias, different sample specifications, and alternative measures.

Authors

• Bolortuya Enkhtaivan, Western Michigan University

• Zagdbazar Davaadorj, Texas A&M International University