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The Effects of a Limited Liability Agreement and Audit Firm Size on Bank Loan Officers' Perceptions of Privately Held Companies' Creditworthiness

Advances in Accounting Behavioral Research

ISBN: 978-1-80455-799-0, eISBN: 978-1-80455-798-3

Publication date: 13 March 2023

Abstract

We examine how auditors' use of limited liability agreements (LLAs) impact perceptions of private company creditworthiness in a 2 × 2 between-subjects experiment. Ninety-three United States-based bank loan officers evaluate whether LLA clauses and the size of the company's external auditor impact lending decisions. We use signaling theory to predict, and we find that LLAs decrease perceived creditworthiness, mainly when the company engages a Non-Big4 auditor. We find no difference in perceived creditworthiness when the company employs a Big4 firm, irrespective of including an LLA clause. Supplemental analyses show that lenders perceive that LLA clauses signal higher credit risk and, in turn, decrease perceived creditworthiness. We offer insights into how lenders integrate information about privately held companies into their decisions, which could impact the cost of capital for private companies. Our study should be of interest to preparers and the varied users of financial statements and regulators.

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Acknowledgements

Acknowledgments

We thank participants at the 2016 Audit Midyear Meeting and the 2016 Diversity Section Midyear Meeting for helpful comments. Importantly, we thank organizers of the 2015 University of Mississippi Banking Symposium and alumni from the Nicholas Center for Corporate Finance and Investment Banking at the University of Wisconsin-Madison for allowing us to distribute our experimental instrument. We also thank Aaron Solomon for research assistance and acknowledge financial support from the University of Wisconsin-Madison and Dalton State University.

Citation

Meeks, A. and Barr-Pulliam, D. (2023), "The Effects of a Limited Liability Agreement and Audit Firm Size on Bank Loan Officers' Perceptions of Privately Held Companies' Creditworthiness", Karim, K.E. (Ed.) Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 26), Emerald Publishing Limited, Leeds, pp. 25-42. https://doi.org/10.1108/S1475-148820230000026002

Publisher

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Emerald Publishing Limited