COST OF DEBT AND AUDITOR CHOICE

Sherry Fang Li and Sherry Fang Li

Accounting & Taxation, 2020, vol. 12, issue 1, 35-44

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.

Keywords: Auditor Choice; Cost of Debt; Debt Sources; Public Debt; Private Debt (search for similar items in EconPapers)
JEL-codes: M41 M42 (search for similar items in EconPapers)
Date: 2020
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