Signing auditors' experience gap and the cost of capital: Evidence from China

Abstract

We investigate whether the experience gap between signing auditors affects investors' and creditors' perceptions of risk assessment, as measured by the cost of capital. Our argument is that the experience gap between signing auditors could lower the information risk and improve audit quality, leading to a decreased cost of capital. Using unique data from China, where the information of the signing auditors can be obtained from audit reports, we find that a higher experience gap between signing auditors is linked to a lower cost of capital. Further analysis reveals that the effect is stronger for firms with higher information asymmetry, lower audit quality and weaker financial environments. Our results suggest that the higher experience gap between signing auditors can reduce information asymmetry by enhancing audit quality, and external investors incorporate this factor into pricing strategy, thereby, resulting in a lower cost of capital.