Auditor Independence and the Cost of Capital Before and after Sarbanes-Oxley: The Case of Newly Issued Public Debt
49 Pages Posted: 18 Aug 2005 Last revised: 12 Jul 2013
Date Written: November 15, 2009
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 supports the argument that SOX has created benefits that resulted in lower cost of borrowing.
Keywords: Auditor Independence, Cost of Capital, Bond Rating, Yield Spread, Sarbanes-Oxley Act
JEL Classification: M41, M42, G12
Suggested Citation: Suggested Citation