Auditor Competition and Cost of Bank Loans

This paper examines the effect of auditor competition on the cost of bank loans of client firms. Exploiting the demise of Arthur Andersen that differently reduces the local audit market competition of metropolitan statistical areas (MSAs), we find a decrease in clients' cost of bank loans in areas with a larger decrease in competition. The competition effect on cost of bank loans is more pronounced when external monitoring is lower and when auditors compete more fiercely with price. Our finding is explained by a model in which clients shop for audit opinions and a more competitive audit market forces auditors to compromise audit quality to maintain client relationship and market share