National Level, City Level Auditor Industry Specialization and Cost of Debt

44 Pages Posted: 2 Feb 2010 Last revised: 1 Mar 2017

See all articles by Chan Li

Chan Li

University of Kansas

Yuan Xie

Fordham University

Jian Zhou

University of Hawaii at Manoa

Date Written: February 2, 2010

Abstract

We examine the relation between industry specialist auditors and cost of debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry specialist auditors, either alone or jointly with national level industry specialist auditors, enjoy significantly lower cost of debt financing measured by both credit rating and bond spread. Our results suggest that, compared to clients of non-industry-specialists, firms’ odds of worse credit ratings are 0.859 (0.664) times lower, and their bond spreads are 17 (16) basis points lower if they are clients of city level only (joint national and city level) industry specialists. In addition, our evidence shows that, for joint national and city level industry specialists, both information and insurance roles are significant to reduce cost of debt financing.

Keywords: auditor industry specialization, national level industry specialist, city level industry specialist, credit rating, bond spread

JEL Classification: M40, M41

Suggested Citation

Li, Chan and Xie, Yuan and Zhou, Jian, National Level, City Level Auditor Industry Specialization and Cost of Debt (February 2, 2010). 2010. Accounting Horizons 24 (3): 395-417.. Available at SSRN: https://ssrn.com/abstract=1546844

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Yuan Xie (Contact Author)

Fordham University ( email )

441E Fordham Road
Bronx, NY 10458
United States

HOME PAGE: http://www.fordham.edu/info/22941/full-time_faculty/4970/yuan_xie

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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