Professional Loan Officers’ Information Search Behavior After Reading Audit Report of a Financially Distressed Company: Evidence From Eye-tracking

In order to respond to the concern about the relevance of auditor reporting when a firm is financially distressed, we examine whether the perceived quality of the signing audit firm (i.e. Big4 or non-Big4 auditor) and going-concern modification affects professional loan officers’ information search behavior. Rather than focusing on the final loan granting decision, it is of interest to examine how loan officers navigate through and integrate the information presented in the related audited financial statements and annual report. Using eye-tracking technology, we are able to thoroughly scrutinize information search of professional loan officers. The findings of this study indicate that not only does the going-concern modification affect lenders’ information search behavior, but also the credibility of the audit report source. Specifically, the results of the first analysis indicate that the presence of going-concern modification significantly increases the attention to the audit report, and especially when it is signed by a Big4 auditor. Moreover, the information most explicitly mentioned in the going-concern paragraph is accessed quickly, indicating an attention directing effect of going-concern paragraph, and this effect is the most evident when the audit report is signed by a Big4 auditor. Finally, the analyses of this study provide evidence on extensive versus superficial information search, which depends on the source credibility in addition to the presence of the going-concern modification. Information search appears to be most extensive when the lender has read a “clean” report signed by a non-Big4 auditor, suggesting that lenders try to gather more information about the seriousness of the financial problems when the perceived quality of the signing audit firm is perceived low and they do not have the guidance from auditor’s going-concern modification. On the contrary, lenders search information more superficially after reading an audit report with going-concern modification signed by a Big4 audit firm, implying that the credibility of the source together with the information provided in the going-concern modification are considered higher. However, differences in extensive and superficial information search appear only in the beginning of the search pattern. The effect of audit report content and the signing audit firm on information search is diluting during the search and participants' overall search patterns are converging.