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Auditor Fees and Cost of DebtDan S. DhaliwalUniversity of Arizona - Department of Accounting Cristi A. GleasonUniversity of Iowa - Department of Accounting Shane HeitzmanSimon School of Business, University of Rochester Kevin MelendrezNew Mexico State University - Department of Accounting & Business Computer Systems Journal of Accounting, Auditing and Finance, Forthcoming Abstract: 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, M49 Accepted Paper SeriesDate posted: November 14, 2007Suggested CitationContact Information
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