The effects of using bank auditors on audit quality and the agency cost of bank loans

K. Hung CHAN, Ellen Jin JIANG, Phyllis Lai Lan MO

Research output: Journal PublicationsJournal Article (refereed)peer-review

8 Citations (Scopus)


SYNOPSIS: In this study, we examine the effect of a borrower having the same auditor as its main creditor bank on audit quality and the cost of the firm’s bank loans. Japan is chosen as the context for this study because of its longestablished bank-based system and the heavy reliance of Japanese companies on bank loans as a source of financing. The recent accounting scandals at Olympus Corporation and Toshiba Corporation highlight concerns about audit quality in Japan. Using a sample of Japanese listed companies, we provide evidence that the more a borrowing company depends on its main bank loans as a source of financing, the more likely the company is to choose the same auditor as its main bank. We also provide empirical evidence that, compared with companies that use different auditors, companies that use the same auditor as their main banks have higher audit quality, which reduces agency problems and results in a lower cost of bank loans. As bank loans are the most important source of external financing for listed and privately held firms in many countries, our results have implications for banks in terms of extending credit to their customers and for firm managers’ financial management.

Original languageEnglish
Pages (from-to)133-153
Number of pages21
JournalAccounting Horizons
Issue number4
Publication statusPublished - 1 Dec 2017


  • Agency cost of bank loan
  • Audit quality
  • Bank-based system
  • Commonality of auditor
  • Information asymmetry

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