Auditor Size and the Cost of Equity Capital over Auditor Tenure

Document Type

Article

Publication Date

11-1-2016

Abstract

This study examines whether the difference in the cost of equity capital between clients of large and small auditors (‘the cost of equity capital disparity’) varies with auditor tenure. We find that the cost of equity capital disparity increases over auditor tenure, suggesting a decline in the perceived audit quality of small auditors relative to large auditors as tenure lengthens. The results suggest that this occurs because there is a deterioration in perceived audit quality over tenure for small auditors combined with no change in perceived audit quality over tenure for large auditors. Furthermore, we find that the cost of equity capital disparity does not increase over auditor tenure for industry specialist auditors, implying that auditor specialization may act as a substitute for auditor size in reducing investor concerns about audit quality declining over tenure for small auditors.

Publication Title

International Journal of Auditing

Volume

20

Issue

3

First Page

278

Last Page

294

Digital Object Identifier (DOI)

10.1111/ijau.12071

ISSN

10906738

E-ISSN

10991123

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