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Auditor Size and the Cost of Equity Capital over Auditor Tenure

Auditor Size and the Cost of Equity Capital over Auditor Tenure 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Auditing Wiley

Auditor Size and the Cost of Equity Capital over Auditor Tenure

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References (94)

Publisher
Wiley
Copyright
© 2016 John Wiley & Sons Ltd
ISSN
1090-6738
eISSN
1099-1123
DOI
10.1111/ijau.12071
Publisher site
See Article on Publisher Site

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.

Journal

International Journal of AuditingWiley

Published: Nov 1, 2016

Keywords: ; ; ;

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