Auditor Changes and the Cost of Bank Debt

Posted: 9 Jul 2016

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Delroy M. Hunter

University of South Florida

Dahlia Robinson

University of South Florida

Michael Robinson

University of Tampa

Xiaojing Yuan

University of Massachusetts Lowell - Department of Finance

Date Written: July 7, 2016

Abstract

We examine the response of informed market participants to the informational signal of auditor changes. Using propensity-score matching and difference-in-differences research designs, we document that loan spreads increase by 22% on bank loans initiated within a year after auditor changes, increasing direct loan costs by approximately $6.6 million. We also find a significant increase in upfront and annual fees and the probability of pledging collateral, consistent with an increase in screening and monitoring by banks. The increase in spreads is significant for client-initiated auditor changes, as well as for auditor resignations. Further, the significant increase in loan spreads is documented for upward, lateral, and downward changes. Our results are robust to other proxies for financial reporting quality. Finally, we find no effect resulting from the forced auditor changes due to Arthur Andersen. Collectively, these results suggest that voluntary auditor changes increase information risk, which is priced in private credit markets.

Keywords: auditor change, information risk, financial reporting quality, loan contracting, loan spreads

Suggested Citation

Francis, Bill B. and Hunter, Delroy M. and Robinson, Dahlia and Robinson, Michael and Yuan, Xiaojing, Auditor Changes and the Cost of Bank Debt (July 7, 2016). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2806568

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Delroy M. Hunter

University of South Florida ( email )

Dept of Finance, Muma College of Business
4202 E. Fowler Ave, BSN3403
Tampa, FL 33620
United States
(813) 843-2085 (Phone)
(813) 974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/hunter-delroy.aspx

Dahlia Robinson (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
8139746888 (Phone)

Michael Robinson

University of Tampa ( email )

401 W Kennedy Blvd
Tampa, FL 33606
United States

Xiaojing Yuan

University of Massachusetts Lowell - Department of Finance ( email )

Lowell, MA 01854
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,400
PlumX Metrics