The Economic Consequences of Audit Market Competition: Evidence from Cost of Bank Financing

Abstract

This paper studies the effect of audit market competition on the clients' cost of bank loans. Exploiting the demise of Arthur Andersen, which differently reduced the local audit market competition of metropolitan statistical areas (MSAs), we find that auditor competition increases the cost of bank loans of auditors' client firms. Further analysis indicates that this effect is more pronounced when external monitoring with respect to financial reporting is weaker and when a client is more economically important to its auditor. The findings are consistent with the auditor-client conflict of interest hypothesis.