Auditor independence and the cost of capital before and after Sarbanes-Oxley: The case of newly issued public debt

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.