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Auditor Independence and the Cost of Capital Before and After Sarbanes-Oxley: The Case of Newly Issued Public Debt

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  • Eli Amir
  • Yanling Guan
  • Gilad Livne

Abstract

An important aim of the Sarbanes-Oxley Act (SOX) was to reduce the cost of capital by enhancing auditor independence. However, prior literature has argued that SOX has been ineffective in meeting this objective. We contribute to this debate by first providing evidence suggesting that auditor independence has increased following SOX. Though we posit an inverse relationship between auditor independence and cost of capital, it is an open question whether this relationship has become stronger or weaker following SOX. An examination of this relationship reveals that auditor independence is more strongly related to bond rating and bond yield premium in the post-SOX period relative to the period before SOX. This evidence suggests greater price sensitivity of corporate debt to the level of auditor independence following SOX. We also show that controlling for the effect of auditor independence and other factors, cost of debt decreased following SOX.

Suggested Citation

  • Eli Amir & Yanling Guan & Gilad Livne, 2010. "Auditor Independence and the Cost of Capital Before and After Sarbanes-Oxley: The Case of Newly Issued Public Debt," European Accounting Review, Taylor & Francis Journals, vol. 19(4), pages 633-664.
    • Handle: RePEc:taf:euract:v:19:y:2010:i:4:p:633-664
    DOI: 10.1080/09638180903503986
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    References listed on IDEAS

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    2. Edward Lee & Norman Strong & Zhenmei (Judy) Zhu, 2014. "Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?," Journal of Accounting Research, Wiley Blackwell, vol. 52(3), pages 733-774, June.
    3. Yu (Elli) Zhang & David Hay & Claus Holm, 2016. "Non-audit services and auditor independence: Norwegian evidence," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1215223-121, December.
    4. Sondes Draief & Adel Chouaya, 2012. "Effet de la gestion comptable et réelle des résultats sur le coût de la dette : analyse avant et après SOX," Post-Print hal-00691020, HAL.
    5. Bi, XiaoGang & Tang, Judy & Tharyan, Rajesh, 2020. "Switching due diligence auditor in Chinese mergers and acquisitions," Research in International Business and Finance, Elsevier, vol. 54(C).
    6. Ester Chen & Ilanit Gavious & Nadav Steinberg, 2019. "Dividends from unrealized earnings and default risk," Review of Accounting Studies, Springer, vol. 24(2), pages 491-535, June.
    7. Mai Dao & Hua-Wei Huang & Jishan Zhu, 2012. "The Effects of Audit Committee Members' Age and Additional Directorships on the Cost of Equity Capital in the USA," European Accounting Review, Taylor & Francis Journals, vol. 22(3), pages 607-643, September.

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