Accounting Seminar（2016-10）

Topic:Connected Auditors and Bank Loan Spreads

Speaker:Lin Cheng, University of Arizona

Time:Monday,June 13, 10:00-11:30

Place:Room217, Guanghua Building 2

Abstract:

In this study, we examine the effect of connected auditors who audit both banks and their borrowers on the bank loan spreads. We hypothesize that having connected auditors reduce information asymmetry between banks and borrowers, and consequently, loan spreads will be lower. To test our hypothesis, we first model the determinants of banks and borrowers sharing the same auditor. Using propensity score matching, we then generate a sample of borrowers with and without connected auditors. Consistent with our hypothesis, we find that the borrowers with connected auditors have significantly lower initial loan spreads than borrowers without connected auditors. Also as expected, we find that the effects of connected auditors are more pronounced when the information asymmetry between the auditors and the borrowers is lower, when the information asymmetry between the banks and the borrowers is higher, and when auditors have stronger incentives to cater to banks’ information and monitoring needs. Finally, we document that having connected auditors is positively associated with longer loan maturities, a lower probability of using performance pricing provisions, and negatively associated with the number of lenders in the loan syndicates. Overall, our results suggest that connected auditors reduce information asymmetry between the lenders and the borrowers, which leads to lower loan spreads.

Introduction: