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- Title
The Value of Auditor Assurance: Evidence from Loan Pricing.
- Authors
Blackwell, David W.; Noland, Thomas R.; Winters, Drew B.
- Abstract
For a sample of revolving credit agreements to small private firms, we measure one potential benefit from obtaining an audit, that of reduced interest rates on bank loans. Our research is motivated by the limited amount of direct empirical research on the value of accounting services (Kinney [1987]) and the inconclusive results of experimental studies on how loan officers use and perceive attested financial statements (see Johnson, Pany, and White [1983], Bamber and Stratton [1997], and Strawser [1991; 1994]). We find, on average, that firms purchasing audits pay lower interest rates after controlling for firm-specific risk factors and relevant loan characteristics, and that the marginal interest rate benefit of an audit is inversely related to firm size. This finding is consistent with Dharan's [1992] prediction that high-quality, small firms purchase audits to signal quality to the debt market. As these firms grow, their reputations also increase, reducing the marginal value of the audit. Our result is also consistent with the substitutability between monitoring mechanisms (such as audits) and reputation in debt markets suggested by Diamond [1991]. For a size-matched subsample of 70 firms, we find that audited firms' interest rates are, on average, 25 basis points lower than those of unaudited firms. In addition, the audited firms in the subsample appear riskier than the unaudited firms, suggesting that riskier firms of a given size can reduce their interest rates by purchasing an audit.
- Subjects
AUDITING; BANK loans; INTEREST rates; CREDIT ratings; ACCOUNTS payable; COMMERCIAL credit
- Publication
Journal of Accounting Research (Wiley-Blackwell), 1998, Vol 36, Issue 1, p57
- ISSN
0021-8456
- Publication type
Article
- DOI
10.2307/2491320