Audit Fees and Cost of Debt: Differences in the Credibility of Voluntary and Mandatory Audits

Economic Research-Ekonomska Istraživanja, 32, 2019

22 Pages Posted: 26 Nov 2019

See all articles by Juan L. Gandía

Juan L. Gandía

University of Valencia - Department of Accounting

David Huguet

University of Valencia - Department of Accounting

Date Written: 2019

Abstract

Despite the extensive research on audit fees, few studies have examined the effect of audit fees on the cost of debt. Based on the credence goods theory, we examine whether the effect of audits on the cost of debt is affected by the type of audit (voluntary or mandatory) and the audit fees, as well as whether there is a combined effect of voluntary audits and audit fees, so that the effect of voluntary audits on the cost of debt is affected by audit fees. Using a sample of Spanish SMEs, we find an asymmetric effect of audit fees on the cost of debt: higher audit fees are associated with a lower cost of debt for voluntarily audited companies, while the association is not significant for mandatory audits. Results suggest that, although the type of audit and the audit fees do not have a direct effect on the credibility of audits, the combination of both factors has relevance for lenders, so that higher audit fees in the voluntary setting are positively valued by them. The study contributes to the literature on auditing by showing that voluntary audits are relevant for capital providers as long as audits are perceived of quality.

Keywords: Auditing, Audit Fees, Credibility, Voluntary Audits, Cost of Debt, SMEs

JEL Classification: M42, G32

Suggested Citation

Gandía, Juan L. and Huguet, David, Audit Fees and Cost of Debt: Differences in the Credibility of Voluntary and Mandatory Audits (2019). Economic Research-Ekonomska Istraživanja, 32, 2019. Available at SSRN: https://ssrn.com/abstract=3482485

Juan L. Gandía (Contact Author)

University of Valencia - Department of Accounting ( email )

Edificio Departamental Oriental
Avda. dels Tarongers, s/n
Valencia 46071
Spain

HOME PAGE: http://www.uv.es/gandiajl/

David Huguet

University of Valencia - Department of Accounting ( email )

Edificio Departamental Oriental
Avda. dels Tarongers, s/n
Valencia 46071
Spain
+34 963 828 272 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
34
Abstract Views
95
PlumX Metrics