Does Auditor Industry Expertise Affect Bank Loan Costs?
Managerial Auditing Journal, Volume 32, Issue 3, March 2017, pp.295-324
Posted: 19 Aug 2015 Last revised: 9 Jun 2018
Date Written: April 1, 2017
We examine whether firms retaining industry specialist auditors receive better price and nonprice terms for bank loans. Based on a sample of companies retaining big N auditors during the 2000-2010 period, we construct six proxies for auditor industry expertise and test three major loan terms: loan spreads, number of general and financial covenants, and requirements for collateral. We find that companies retaining industry specialist auditors receive lower interest rates and fewer covenants. Banks are also less likely to demand secured collateral. These findings are supported by several sensitivity tests. Our findings suggest that auditor industry expertise provides incremental value to creditors and that bank loan cost is one economic benefit for companies hiring specialist auditors.
Keywords: auditor industry specialization; bank loan contracting; loan spreads; covenant; collateral
JEL Classification: M4
Suggested Citation: Suggested Citation