The Value of Auditor Assurance: Evidence from Loan Pricing

This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. The relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender, controlling for other potentially important firm and loan characteristics is analyzed using multivariate regressions. It is found, on average, that firms purchasing audits pay lower interest rates after controlling for firm-specific risk factors and relevant loan characteristics, and that the marginal interest rate benefit of an audit is inversely related to firm size.