Auditor Size and the Cost of Equity Capital Over Auditor Tenure

17 Pages Posted: 12 Oct 2016

See all articles by David Bryan

David Bryan

University of North Florida

J. Kenneth Reynolds

Florida State University

Date Written: November 2016

Abstract

This study examines whether the difference in the cost of equity capital between clients of large and small auditors (‘the cost of equity capital disparity’) varies with auditor tenure. We find that the cost of equity capital disparity increases over auditor tenure, suggesting a decline in the perceived audit quality of small auditors relative to large auditors as tenure lengthens. The results suggest that this occurs because there is a deterioration in perceived audit quality over tenure for small auditors combined with no change in perceived audit quality over tenure for large auditors. Furthermore, we find that the cost of equity capital disparity does not increase over auditor tenure for industry specialist auditors, implying that auditor specialization may act as a substitute for auditor size in reducing investor concerns about audit quality declining over tenure for small auditors.

Keywords: Audit quality, auditor tenure, auditor industry specialization, cost of equity capital

Suggested Citation

Bryan, David and Reynolds, J. Kenneth, Auditor Size and the Cost of Equity Capital Over Auditor Tenure (November 2016). International Journal of Auditing, Vol. 20, Issue 3, pp. 278-294, 2016, Available at SSRN: https://ssrn.com/abstract=2851207 or http://dx.doi.org/10.1111/ijau.12071

David Bryan (Contact Author)

University of North Florida ( email )

4567 St. Johns Bluff Road, South
Jacksonville, FL 32224-2645
United States

J. Kenneth Reynolds

Florida State University ( email )

Tallahasse, FL 32306
United States

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