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Auditor choice and bank risk taking

Jorg Bley, Mohsen Saad and Anis Samet

International Review of Financial Analysis, 2019, vol. 61, issue C, 37-52

Abstract: We investigate the importance of auditor choice on bank risk-taking in a cross-country setting for 5498 banks from 116 emerging and developed countries. Using the Z-score as our main proxy for bank risk, we report evidence that hiring a Big Four auditing firm reduces bank-risk even after controlling for bank and country variables. The reported evidence is valid for banks outside the United States and is robust to concerns relating to endogeneity and alternative banking risk measures. The results are economically meaningful. All else constant, the Z-score of a bank audited by a Big Four firm is 10.4% higher than a similar bank with a non-BIG Four auditor. Moreover, consistent with the view that Big Four auditors serve a corporate governance mechanism in emerging markets, we find that Big Four auditors maintain the ability to curb bank risk in countries characterized by weak institutions. Finally, our results suggest that while audit quality is associated with bank safety, its impact is reduced in countries that require audit-oversight.

Keywords: Banking; Audit quality; Corporate governance; Risk taking (search for similar items in EconPapers)
JEL-codes: G34 G32 (search for similar items in EconPapers)
Date: 2019
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