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Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market

46 Pages Posted: 31 Mar 2003  

Sattar Mansi

Virginia Tech

William F. Maxwell

SMU - Cox School

Darius P. Miller

Southern Methodist University (SMU) - Edwin L. Cox School of Business

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Abstract

We examine the relation between auditor characteristics (quality and tenure) and the cost of debt financing. Consistent with the hypothesis that audit characteristics are important to the capital markets, we find that (i) auditor quality and tenure are negatively and significantly related to the cost of debt financing, (ii) the relation between auditor characteristics and the cost of debt is most pronounced in firms with non-investment grade debt, and (iii) both the insurance and information role of audits are economically significant to the cost of debt. Overall, our results suggest that, through their dual roles of providing information and insurance, auditor quality and tenure matter to capital market participants.

Keywords: information asymmetry, bond market, audit quality, auditor tenure, mandatory rotation, insurance

JEL Classification: M49, G12, L14, D82, M41

Suggested Citation

Mansi, Sattar and Maxwell, William F. and Miller, Darius P., Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market. Available at SSRN: https://ssrn.com/abstract=384594 or http://dx.doi.org/10.2139/ssrn.384594

Sattar Mansi

Virginia Tech ( email )

William F. Maxwell

SMU - Cox School ( email )

Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States

Darius P. Miller (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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