Auditor fees and cost of debt

Dan S. Dhaliwal, Cristi A. Gleason, Shane Heitzman, Kevin D. Melendrez

Research output: Contribution to journalArticle

47 Scopus citations

Abstract

Using a sample of 560 new debt issues, we investigate the relation between audit, nonaudit, and total auditor fees and firms' cost of debt. The Securities and Exchange Commission (SEC) argues that fees from nonaudit services weaken auditor independence, reduce financial statement reliability, and increase firms' cost of capital. To test this assertion, we examine the association between auditor fees and the cost of debt, as well as the effects of auditor fees on the relation between financial statement information and the cost of debt. We find evidence that nonaudit fees are directly related to the cost of debt for investment-grade issuers. Our results are robust to controlling for auditor tenure and firm governance. We also find evidence that the association between earnings and the cost of debt decreases as audit fees increase. We find no evidence that auditor fees directly affect the cost of debt for the non-investment-grade firms, but we do find that the association between earnings and the cost of debt decreases as nonaudit fees increase.

Original languageEnglish (US)
Pages (from-to)1-22
Number of pages22
JournalJournal of Accounting, Auditing and Finance
Volume23
Issue number1
DOIs
StatePublished - Jan 1 2008

Keywords

  • Auditor independence
  • Bonds
  • Cost of capital

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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