The Economic Consequences of Financial Certifier Competition

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