Auditor Changes and the Cost of Bank Debt
Posted: 9 Jul 2016
Date Written: July 7, 2016
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
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