Auditors Matter Most in Debt Markets When Trust is Low
In our study we analyze a large sample of non-US public firms from 31 countries that obtain private loans. We find that loan syndicates lending to borrowers that employ Big N auditors are larger and less concentrated, and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that such an effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves in the global debt market. Our results are robust to various additional tests that address endogeneity issues.
Our results are not obvious given the prior findings in the literature. The multiparty nature of loan syndicates creates information asymmetry between borrowers and lenders, as well as amongst the lenders themselves. It is unclear whether Big N auditors around the world are able to reduce both types of information asymmetry as found in the US-only studies, given that the US is unique with regard to both the role of auditors and the lending market itself.
More importantly, this study is able to provide insights beyond those found in prior studies by exploiting the variation offered in an international setting. Our finding that the positive effect of Big N auditors exists only in countries with strong creditor rights and with high levels of societal trust is consistent with auditors offering an additional layer of protection in countries where lenders are more concerned about country-specific risks.
Our study adds further to our understanding of the role of high quality auditing in the global audit market. Additionally, we contribute to the growing literature investigating the role of auditors in debt markets, and our findings suggest that auditors play an important role in increasing lending efficiency by reducing information asymmetry between borrowers and lenders. However, we fail to find that high quality auditors are able to mitigate the concerns from information asymmetry between more informed lead arrangers and other less informed participants in the global market.
Zhiming Ma is an Assistant Professor of Accounting at Guanghua School of Management, Peking University.
Derrald Stice is an Assistant Professor of Accounting at The Hong Kong University of Science and Technology (HKUST).
Rencheng Wang is a Senior Lecturer at the UQ Business School, The University of Queensland.