The effect of auditor attestation and tolerance for ambiguity on commercial lending decisions

We begin this study by developing a model of the decisions made by bank loa n officers when they evaluate a commercial loan. The model indicates that l oan officers make three sequential decisions: level of risk associated with the loan, whether to recommend the loan, and the interest rate to be charg ed. We assume that the financial information included with a commercial loa n application can be audited, reviewed, or prepared by management with no i nvolvement by their auditors. We argue that the level of attestation should affect the perceived credibility, or conversely, the relative amount of am biguity of the financial statements presented by management. Tolerance for ambiguity should affect how commercial lending officers handle this ambigui ty. We test these effects by varying the level of attestation in a between-subj ects experiment with commercial loan officers. Subjects are asked to make j udgments on the risk of the loan, whether they would recommend the loan, an d the interest rate to be charged. Subjects also completed a tolerance-for- ambiguity instrument. Results of the study indicate that only tolerance for ambiguity significant ly affects the risk-assessment judgment. Auditor attestation had no effect on risk assessment. Risk assessment in turn significantly affects the decis ion to recommend the loan. Finally, the previous risk-assessment decision, tolerance for ambiguity, and the interaction between attestation and tolera nce for ambiguity significantly affect the interest rate decision.