Loan initiation and audit pricing

Abstract

We examine the effect of lenders’ certification for pricing of auditing services for the borrowers. We find that audit fees decrease after obtaining a new loan from banks, suggesting that banks’ certification of firms’ future performance has decreased auditors’ perceived risks associated with their clients. Furthermore, we show that the certification effect is stronger among firms associated with higher ex ante risk measured by ex ante leverage and cash-flow volatility. Our study contributes to both auditing and banking literature by documenting that lenders’ certification has significant impact on one of the important capital market participants, auditors.