Do Audit Fees Influence Credit Risk and Asymmetric Information Problems? Evidence from the Syndicated Loan Market

Abstract

In the syndicated loan market, potential accounting errors exacerbate credit risk and asymmetric information problems. The purpose of financial statement audits is to provide reasonable assurance that accounting records are free from material errors. In this paper, we examine whether an increase in the demand for auditing services is associated with a decrease in borrowers' credit risk and asymmetric information problems in the syndicated loan market. We present empirical evidence that a demand-induced increase in audit fees is associated with syndicated loans with lower interest rate spreads and shorter maturity lengths, which we interpret as evidence consistent with the assertion that these audit fee increases reduce credit-risk and asymmetric information problems. We empirically identify an increase in the demand for auditing services with instrumental variables that are intended to capture shifts in the demand curve for auditing services, rather than shifts in the supply curve for auditing services. In addition, we find that audit fees are positively associated with the number of lenders in loan syndicates, but are unable to attribute this association to an increase in the demand for auditing services.