Audit Profession Development and Bank Loan Contracting

Auditing: A Journal of Practice &Theory (Forthcoming)

Posted: 8 Jan 2021

See all articles by Wenxia Ge

Wenxia Ge

University of Ottawa

Tony Kang

University of Nebraska at Lincoln - School of Accountancy

Byron Y. Song

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Gaoguang (Stephen) Zhou

Hong Kong Baptist University

Date Written: November 13, 2020

Abstract

This study examines the relation between country-level audit profession development (APD) and bank loan contracting around the world. Using a sample of bank loan data from 35 countries, we find that stronger APD is associated with more favorable loan terms, such as lower loan spreads, fewer covenants, and larger loan amounts. These effects are stronger in countries with a weaker rule of law. We also find that stronger APD attracts significantly more lenders participating in loans and more foreign lenders leading loans. A breakdown of APD into three subcategories, namely, auditor education, auditor independence and liability, and auditor oversight, reveals that all three influence various contracting terms. We also provide evidence that stronger APD is associated with a higher degree of timely loss recognition. Collectively, our findings show that APD improves bank loan contracting terms.

Keywords: Audit profession development; bank loan contracting; foreign lenders; information risk; loan syndicate

JEL Classification: F34; K20; M41; M42

Suggested Citation

Ge, Wenxia and Kang, Tony and Song, Byron Y. and Zhou, Gaoguang (Stephen), Audit Profession Development and Bank Loan Contracting (November 13, 2020). Auditing: A Journal of Practice &Theory (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3730671

Wenxia Ge

University of Ottawa ( email )

55 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Tony Kang (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Byron Y. Song

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Gaoguang (Stephen) Zhou

Hong Kong Baptist University ( email )

Kowloon Tong
Hong Kong
China

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