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Auditors and Relationship Banking

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  • Timothy Hinkel

Abstract

This study examines whether a bank’s relationship with a borrowing firm’s external auditor through a shared client portfolio affects loan pricing. I find that when lenders’ portfolios are more concentrated in firms engaging a particular auditor, borrowers who engage that auditor enjoy lower spreads. This relation is only evident when the lender is the lead arranger who is primarily responsible for information gathering about the borrower. Tests suggest the reduction in information asymmetry facilitating these lower borrowing costs occurs via banks’ enhanced ability to interpret the audited financial statements when they have greater familiarity with the external auditor. My results are relevant to debt-seeking firms who should be mindful of their auditor’s relationship with prospective lenders, as well as regulators seeking to better understand how auditors can affect corporate financing outcomes.

Suggested Citation

  • Timothy Hinkel, 2019. "Auditors and Relationship Banking," Accounting and Finance Research, Sciedu Press, vol. 8(3), pages 219-219, August.
    • Handle: RePEc:jfr:afr111:v:8:y:2019:i:3:p:219
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    References listed on IDEAS

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    1. Pittman, Jeffrey A. & Fortin, Steve, 2004. "Auditor choice and the cost of debt capital for newly public firms," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 113-136, February.
    2. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    3. Jeong-Bon Kim & Byron Song & Judy Tsui, 2013. "Auditor size, tenure, and bank loan pricing," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 75-99, January.
    4. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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