Client importance, bank risk, and systemic risk

Purpose - The purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks. Design/methodology/approach - The authors use archival research method. Findings - The authors mainly find that client importance is negatively related with future bank-specific crash risk and distress risk, and also with sector-wide systemic crash risk and systemic distress risk in the future. The authors also report some evidence that these relations become more pronounced during the crisis period than during the non-crisis period. Moreover, the effect of client importance on systemic risk is found to strengthen in banks audited by Big-N auditors, by auditors without clients who restate earnings, and by auditors with more industry expertise. Research limitations/implications - These findings contribute to the auditing and systemic risk literature. Practical implications - This study has implications for regulating the banking industry. Originality/value - This study provides original evidence on how client importance affects bank-specific risk and systemic risk of the banking industry.