Auditor Independence and the Cost of Capital Before and after Sarbanes-Oxley: The Case of Newly Issued Public Debt

Posted: 30 May 2011 Last revised: 4 Jun 2011

See all articles by Eli Amir

Eli Amir

Tel Aviv University

Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Gilad Livne

University of Exeter Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 11, 2009

Abstract

An important aim of the Sarbanes-Oxley Act (SOX) was to reduce cost of capital by enhancing auditor independence. However, prior literature has argued that SOX has been ineffective in meeting this objective. We contribute to this debate by first providing evidence suggesting that auditor independence has increased following SOX. Though we posit an inverse relationship between auditor independence and cost of capital, it is an open question whether this relationship has become stronger or weaker following SOX. An examination of this relationship reveals that auditor independence is more strongly related to bond rating and bond yield premium in the post-SOX period relative to the period before SOX. This evidence suggests greater price sensitivity of corporate debt to the level of auditor independence following SOX. We also show that controlling for the effect of auditor independence and other factors, cost of debt decreased following SOX.

Keywords: Sarbanes-Oxley Act (SOX), Auditor Independence, Cost of Capital, Bond Rating, Yield Spread

JEL Classification: M41, M42, G12

Suggested Citation

Amir, Eli and Guan, Yanling and Livne, Gilad, Auditor Independence and the Cost of Capital Before and after Sarbanes-Oxley: The Case of Newly Issued Public Debt (November 11, 2009). European Accounting Review, Vol. 19, No. 4, pp. 633-664, 2010, Available at SSRN: https://ssrn.com/abstract=1855473

Eli Amir (Contact Author)

Tel Aviv University ( email )

312 Recanati Bldg.
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Israel
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Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Gilad Livne

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

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