Competition and Certification: Theory and Evidence from the Audit Market

59 Pages Posted: 19 Nov 2018 Last revised: 3 Jan 2024

See all articles by Heng Geng

Heng Geng

Victoria University of Wellington

Cheng Zhang

University of Denver

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: December 31, 2023

Abstract

We study how financial certifier competition influences syndicated loan contracting in the context of financial auditing. Exploiting the unexpected demise of Arthur Andersen that exogenously decreased auditor competition, we find a greater decrease in loan spread for borrowers in markets where certifier competition declined more. Additional analyses suggest the result stems from enhanced audit quality and reduced credit risk. The effect of certifier competition is stronger for borrowers with weaker external monitoring and those generating significant revenue for their auditors. Our evidence highlights the real effect of financial certifier competition.

Keywords: Certification; Auditor competition; Conflict of interest; Audit quality; Syndicated lending

JEL Classification: D43, G21, M42, M49

Suggested Citation

Geng, Heng and Zhang, Cheng and Zhou, Frank, Competition and Certification: Theory and Evidence from the Audit Market (December 31, 2023). Available at SSRN: https://ssrn.com/abstract=3274044 or http://dx.doi.org/10.2139/ssrn.3274044

Heng Geng

Victoria University of Wellington ( email )

PO Box 600
Wellington, 6140
New Zealand

Cheng Zhang

University of Denver ( email )

2101 S University Blvd
Denver, CO 80210
United States

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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