We begin this study by developing a model of the decisions made by bank loan officers when they evaluate a commercial loan. The model indicates that loan officers make three sequential decisions: level of risk associated with the loan, whether to recommend the loan, and the interest rate to be charged. We assume that the financial information included with a commercial loan application can be audited, reviewed, or prepared by management with no involvement by their auditors. We argue that the level of attestation should affect the perceived credibility, or conversely, the relative amount of ambiguity of the financial statements presented by management. Tolerance for ambiguity should affect how commercial lending officers handle this ambiguity.
We test these effects by varying the level of attestation in a between-subjects experiment with commercial loan officers. Subjects are asked to make judgments on the risk of the loan, whether they would recommend the loan, and the interest rate to be charged. Subjects also completed a tolerance-for-ambiguity instrument.
Results of the study indicate that only tolerance for ambiguity significantly affects the risk-assessment judgment. Auditor attestation had no effect on risk assessment. Risk assessment in turn significantly affects the decision to recommend the loan. Finally, the previous risk-assessment decision, tolerance for ambiguity, and the interaction between attestation and tolerance for ambiguity significantly affect the interest rate decision.
Key Words: Attestation, Tolerance for ambiguity, Lending decisions, Risk assessment. Data Availability: Please contact the first author concerning data availability.
When management provides financial information to external users, they may have a choice of the level of auditor attestation they can have added to the information. If management chooses not to involve public accountants at all, the information will have relatively little credibility as many estimates and discretionary accruals are included in the preparation of financial statements (Becker et al. 1998). To provide some level of credibility, management may choose to have financial statements reviewed by public accountants (Kiger and Scheiner 1997, 5; CICA 1999, CICA Handbook, Section 8100.05). Management may also have the information audited, which provides the highest level of credibility but at the highest cost (Nichols and Smith 1983; O'Keefe and Barefield 1985; Simunic and Stein 1987). (1) In making the decision about the level of attestation that should be associated with financial information, management should select the level of attestation that provides an acceptable level of assurance to users at the lowest cost to maximize corporate profits. As securities commissions normally require audits for publicly traded companies, only creditors such as commercial loan officers are regularly exposed to different levels of attestation.
When loan officers review loan applications, they consider the financial information provided by management. They should find that audited information is more credible than information that is reviewed and, in turn, should find that reviewed information is more credible than information that is prepared by management.
Whether loan officers' decisions actually reflect these levels of auditor involvement is not clear. Similarly, it is not known if loan officers' tolerance for ambiguity affects their interpretation of information that has different levels of attestation. The purpose of this study is to determine whether commercial loan officers' decisions are affected by different levels of attestation and by lenders' tolerance for ambiguity.
The commercial lending decision includes several sources of ambiguity and uncertainty. The fundamental uncertainty is the loan applicant's "true" financial position, the assessment of which is critical in evaluating the applicant's ability to make future loan payments. …