Is the market valuation of banks’ loan loss provision conditional on auditor reputation? |
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Authors: | Kiridaran Kanagaretnam Gopal V Krishnan Gerald J Lobo |
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Institution: | 1. DeGroote School of Business, McMaster University, Hamilton, Ontario, Canada L8S 4M4;2. College of Business and Economics, Lehigh University, Bethlehem, PA 18015, United States;3. C.T. Bauer College of Business, University of Houston, 334 Melcher Hall, Houston, TX 77204-6021, United States |
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Abstract: | We examine how auditor reputation conditions the market valuation of banks’ loan loss provision (LLP). The inherent uncertainty associated with and discretion permitted in estimating the LLP contributes to information asymmetry. The auditor’s certification and monitoring roles influence firm value by mitigating this information asymmetry. We examine two aspects of auditor reputation, auditor type (Big 5 vs. non-Big 5) and auditor expertise, in the banking industry. We find a significant, positive association between the discretionary component of LLP and stock return for banks audited by the Big 5 auditors. Further analysis indicates that auditor expertise within banking and not auditor type drives this significant, positive association. Overall, our results are consistent with auditor expertise in the banking industry mitigating information asymmetry between bank managers and investors and enhancing the information conveyed by discretionary loan loss provision. |
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Keywords: | G14 G21 M41 M42 |
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