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Auditor Size and the Cost of Equity Capital over Auditor Tenure
Author(s) -
Bryan David B.,
Reynolds J. Kenneth
Publication year - 2016
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/ijau.12071
Subject(s) - audit , accounting , business , quality audit , equity (law) , auditor independence , cost of capital , joint audit , auditor's report , external auditor , economics , internal audit , political science , profit (economics) , law , microeconomics
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.