Auditor Fees and Cost of Debt
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Cristi A. Gleason
University of Iowa - Department of Accounting
Simon School of Business, University of Rochester
New Mexico State University - Department of Accounting & Business Computer Systems
Journal of Accounting, Auditing and Finance, Forthcoming
Using a sample of 560 new debt issues, we investigate the relation between audit, nonaudit, and total auditor fees and firms' cost of debt. The Securities and Exchange Commission (SEC) argues that fees from nonaudit services weaken auditor independence, reduce financial statement reliability, and increase firms' cost of capital. To test this assertion, we examine the association between auditor fees and the cost of debt, as well as the effects of auditor fees on the relation between financial statement information and the cost of debt. We find evidence that nonaudit fees are directly related to the cost of debt for investment-grade issuers. Our results are robust to controlling for auditor tenure and firm governance. We also find evidence that the association between earnings and the cost of debt decreases as audit fees increase. We find no evidence that auditor fees directly affect the cost of debt for the non-investment-grade firms, but we do find that the association between earnings and the cost of debt decreases as nonaudit fees increase.
Keywords: Auditor Independence, Cost of Capital, Bonds
JEL Classification: G10, G32, M41, M49Accepted Paper Series
Date posted: November 14, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.406 seconds