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Cost Of Debt And Auditor Choice

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  • Sherry Fang Li
  • Sherry Fang Li

Abstract

This paper examines whether auditor choice affects a firm’s cost of debt and whether debt sources matter. We find that the choice of a brand name or industry specialist auditor decreases a firm’s cost of debt. The additional impact of industry specialization, however, is not significant for the sub-sample of Big N audited firm-years. For the sub-sample of non-Big N audited firm-years, engaging an industry specialist auditor appears to increase cost of debt. A further breakdown of the full sample into a sample with only private debt and a sample with both public and private debt provides more insight. For the sample with both public and private debt, engaging a brand name and specialist auditor decreases cost of debt. But for the sample with only private debt, engaging a specialist auditor increases cost of debt. Our findings provide additional evidence for the role of external auditing in reducing cost of debt and show differences between the two dimensions of auditor differentiation: brand name reputation and industry specialization. Furthermore, our findings suggest that the choice of an industry specialist auditor has different impact on cost of debt for firms that have only private debt and firms that also have public debt.

Suggested Citation

  • Sherry Fang Li & Sherry Fang Li, 2020. "Cost Of Debt And Auditor Choice," Accounting & Taxation, The Institute for Business and Finance Research, vol. 12(1), pages 35-44.
    • Handle: RePEc:ibf:acttax:v:12:y:2020:i:1:p:35-44
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    References listed on IDEAS

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    More about this item

    Keywords

    Auditor Choice; Cost of Debt; Debt Sources; Public Debt; Private Debt;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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