Does auditor industry expertise affect bank loan costs?

Abstract

Purpose

This paper aims to examine whether firms retaining industry-specialist auditors receive better price and non-price terms for bank loans.

Design/methodology/approach

Based on a sample of companies retaining big N auditors during the 2000-2010 period, this paper constructed six proxies for auditor industry expertise and tested three major loan terms: loan spreads, number of general and financial covenants and requirements for collateral.

Findings

It was found that companies retaining industry-specialist auditors receive lower interest rates and fewer covenants. Banks are also less likely to demand secured collateral. These findings are supported by several sensitivity tests.

Research limitations/implications

The findings suggest that auditor industry expertise provides incremental value to creditors and that bank loan cost is one economic benefit for companies hiring specialist auditors.

Originality/value

To the best of the authors’ knowledge, this study is the first to investigate the impact of auditor industry expertise on the cost of private debts.

Citation

Zhang, Y., Sun, F. and Xian, C. (2017), "Does auditor industry expertise affect bank loan costs?", Managerial Auditing Journal, Vol. 32 No. 3, pp. 295-324. https://doi.org/10.1108/MAJ-07-2015-1230