The Impact of Credit Market Development on Auditor Choice: Evidence from Banking Deregulation

55 Pages Posted: 7 Dec 2021

See all articles by Gus De Franco

Gus De Franco

Tulane University - A.B. Freeman School of Business

Yuyan Guan

Nanyang Business School, Nanyang Technological University

Yibin Zhou

University of Texas at Dallas - Naveen Jindal School of Management

Xindong Kevin Zhu

City University of Hong Kong (CityU)

Date Written: December 6, 2021

Abstract

Exploiting the staggered state-level adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA), we examine whether and how banking deregulation affects firms’ auditor choices. We find that an exogenous increase in the degree of interstate branch banking deregulation leads to a reduction in firms’ propensity to engage Big N or industry expert auditors. In cross-sectional analyses, we further find that the negative effect of banking deregulation on firms’ auditor choices is more pronounced among firms with greater dependence on external financing as well as firms headquartered in the states with less-sophisticated local banks prior to deregulation and more-sophisticated entering banks following deregulation. Such evidence is consistent with banking deregulation exerting its effect on firms’ auditor choices through two underlying channels —firms’ increased access to bank credit and banks’ strengthened monitoring of firms. Our study sheds light on how the infrastructure of the U.S. credit market shapes firms’ auditor-choice decisions and provides evidence supporting the idea that auditors can serve as a governance substitute for weaker institutions.

Keywords: Auditor choice; Banking and branching deregulation; Credit market development; Corporate governance.

JEL Classification: G21, M42, G30, K22.

Suggested Citation

De Franco, Gus and Guan, Yuyan and Zhou, Yibin and Zhu, Xindong Kevin, The Impact of Credit Market Development on Auditor Choice: Evidence from Banking Deregulation (December 6, 2021). Available at SSRN: https://ssrn.com/abstract=3979068 or http://dx.doi.org/10.2139/ssrn.3979068

Gus De Franco (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Yuyan Guan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Yibin Zhou

University of Texas at Dallas - Naveen Jindal School of Management ( email )

2601 N. Floyd Road
Richardson, TX 75080
United States

Xindong Kevin Zhu

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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