This study examines the association between convertible debt usage and the pricing of audit services. We test the (nondirectional) hypothesis that convertible debt usage is associated with audit effort and therefore fees, due to its association with client business risk and its dilutive effect on earnings per share. We find a positive association between audit fees and convertible debt, suggesting that auditors view convertible debt as a source of risk. We also find that audit fees related to convertible debt are sensitive to CEO bonus incentives and to market valuation incentives. Our results suggest that following the Public Company Accounting Oversight Board (PCAOB) regulation, auditors exert greater effort on convertible debt, but no additional effort on straight debt. Our inferences are robust to using a change in audit fees specification, controlling for litigation risk, and controlling for functional form misspecification.

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