The Impact of Mandatory Auditor Tenure Disclosures on the Cost of Debt



This study examines the relationship between the mandatory disclosure of auditor tenure under AS 3101 and the cost of debt. We find that, on average, yield spreads on seasoned bond trades decrease after AS 3101 as auditor tenure increases. Cross-sectional tests suggest that the effect is stronger for companies that did not disclose tenure voluntarily in proxy statements before AS 3101 relative to companies that did make voluntary disclosures. We also find that yield spread changes are more sensitive to auditor tenure disclosures when bonds are not investment grade, when the audit office is large, and when there are fewer concerns regarding auditor independence. Overall, our results support the PCAOB’s view that the mandatory audit report disclosure of auditor tenure provides valuable information to external stakeholders.