Credit availability, signalling and auditor choice

Abstract

Taken the cancellation of the upper limit of loan interest rates as a quasinatural experiment and based on the signal theory of auditor demand, this paper investigates how the improvement of credit availability affects the choice of auditors. Results show that, compared with low-risk enterprises, high-risk enterprises tend to choose high-quality audits because of the increased loan availability after the liberalisation of the loan interest rate ceiling, and this tendency is more pronounced in the corporations with higher financing constraints. The above results are still valid after a series of robustness tests. Further analysis reveals that high-risk companies choosing high-quality auditors do obtain more long-term loans after the loan interest rate ceiling was lifted. This study identifies the causal relationship between credit availability and auditor choice, and also provides empirical evidence for the signal function of high-quality auditors in China’s credit market.