The Economic Consequences of Financial Certifier Competition

46 Pages Posted: 19 Nov 2018 Last revised: 5 Aug 2021

See all articles by Heng Geng

Heng Geng

Victoria University of Wellington

Cheng Zhang

Victoria University of Wellington - Te Herenga Waka

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: August 4, 2021

Abstract

This paper studies the effect of financial certifier competition on syndicated loan contracting. Using the sudden demise of the U.S. fifth largest certifier of financial statements (i.e., auditor) as a shock to local certifier competition, we find a greater decrease in loan pricing for borrowers in markets where certifier competition declined more. The effect of certifier competition is concentrated in borrowers with weaker shareholder monitoring and those contributing more revenue to their auditors. Our evidence shows that certifier competition deteriorates service quality, which lenders (i.e., consumers of the certification outcomes) understand and price when contracting with borrowers.

Keywords: Certifier competition; Interest cost; Conflict of interest; Service quality; Syndicated lending

JEL Classification: D43, M43, G21, M49

Suggested Citation

Geng, Heng and Zhang, Cheng and Zhou, Frank, The Economic Consequences of Financial Certifier Competition (August 4, 2021). 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

Victoria University of Wellington - Te Herenga Waka ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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