Big 4 auditors, client informational problems, and bank loan contracting: evidence from Saudi Arabia

Purpose This study has three objectives: (i) to examine whether using a Big 4 auditor reduces loan interest rates; (ii) to analyze how loan interest rates differ between smaller firms, which face more acute asymmetric information problems, and larger firms; and (iii) to investigate whether the negative relationship between Big 4 auditors and loan interest rates is a function of client size. Design/methodology/approach The sample comprises all publicly traded nonfinancial companies listed on the Saudi Stock Exchange from 2007 to 2020. Pooled ordinary least squares (OLS) regression tests the hypothesized relationship between the dependent and independent variables. Findings The study offers three notable findings. First, borrowers audited by Big 4 auditors receive significantly lower interest rates than those audited by non-Big 4 auditors. Second, banks offer lower interest rates to larger firms (i.e. firms with fewer informational problems) than to smaller ones. Third, no conclusive evidence exists that the beneficial effects of Big 4 auditors (in terms of reduced interest rates) differ significantly between larger and smaller firms. This finding is attributable to the idea that Big 4 auditors do not report more favorably for larger clients or more conservatively for smaller clients. The results remain robust, even after addressing the endogeneity arising from auditor self-selection bias, which is validated by the results of two econometric tests: Heckman’s two-stage procedure and propensity score matching. Originality/value To the best of the author’s knowledge, this study is the first to examine the relationship between auditor size and bank loan contracting in Saudi Arabia.