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

Posted: 16 Mar 2004

See all articles by Sattar Mansi

Sattar Mansi

Virginia Tech

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Darius P. Miller

Southern Methodist University (SMU) - Finance Department

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

JEL Classification: D82, M41, M49, G32

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=516942

Sattar Mansi

Virginia Tech ( email )

William F. Maxwell

Southern Methodist University (SMU) - Finance Department ( email )

United States

Darius P. Miller (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

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