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

See all articles by Eli Amir

Eli Amir

Tel Aviv University

Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Gilad Livne

University of Exeter Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2009

Abstract

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

Amir, Eli and Guan, Yanling and Livne, Gilad, Auditor Independence and the Cost of Capital Before and after Sarbanes-Oxley: The Case of Newly Issued Public Debt (November 15, 2009). London Business School and Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=781844 or http://dx.doi.org/10.2139/ssrn.781844

Eli Amir

Tel Aviv University ( email )

312 Recanati Bldg.
69978 Tel Aviv
Israel
+972 3 640-8510 (Phone)
+972 3 640-7738 (Fax)

Yanling Guan

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Gilad Livne (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

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