The more, the merrier? The role of an auditor's certification in loan pricing

Abstract

Purpose

The purpose of this paper is to explore the role of three different audit characteristics in loan pricing—the most significant credit term for borrowers. Three characteristics include audit reputation, audit tenure and audit specialization.

Design/methodology/approach

To examine audit characteristics simultaneously to measure their effect on loan pricing, this study uses a full-rank, three-way interaction model and conducts slope difference tests. It also includes the joint effects of these variables to estimate any incremental benefits of possessing multiple qualifications.

Findings

When studying the three qualifications together, none of them alone is strong enough to affect the loan interest. But, a Big 4 auditor with tenure can benefit the client by reducing the interest by about 1.98%. The more expertise the auditor has, the better value it brings to borrowers. A highly qualified auditor with additional expertise can significantly reduce loan pricing further by about 2.96 percent.

Originality/value

Examining the costs and benefits of hiring certified auditors is crucial for borrowers. While the variables are not exhaustive, an understanding of the added value of hiring high-quality auditors with more than one or two qualifications to their potential premium fees helps borrowers in managers' audit selection decisions. At the same time, the results shed some light on which of the auditor's qualifications lenders might prioritize when pricing a borrower's loan.

Citation

Enkhtaivan, B. and Davaadorj, Z. (2023), "The more, the merrier? The role of an auditor's certification in loan pricing", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-03-2023-0170