SYNOPSIS

We examine the association between auditor industry expertise and clients' cost of equity. Prior research suggests that industry experts are associated with higher earnings quality than non-experts. If such improved earnings quality were recognized by investors, we would expect it to be reflected in a lower cost of equity. Following recent research in this area, we distinguish between national-only, city-only, and joint city-national industry-expert auditors. Our results suggest that clients audited by city-only or joint city-national industry experts have a lower cost of equity. We also examine whether changing from non-expert (expert) to expert (non-expert) auditors result in a decrease (increase) in cost of equity. We find that when firms change from non-experts to city-only or joint city-national experts, their cost of equity is significantly decreased.

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