Fresh Eyes or Familiar Ties? Auditor Tenure and Its Impacts on Debt Markets

Abstract

Investors rely of financial statements when making their investment decisions. Independent auditors are expected to enhance this trust by producing high-quality audits. The study examines the impact of auditor independence (measured through auditor tenure – categorized into short, medium, and long auditor tenures) on the cost of debt, with the moderating role of Big4 audit firms, using the data from non-financial companies listed at the Pakistan Stock Exchange. The Generalized Method of Moments (GMM) regression technique is applied as the data suffered from the issues of autocorrelation and heteroscedasticity. The results support the “fresh-eyes” argument by revealing a non-linear relationship between auditor tenure and cost of debt, as short and medium auditor tenures are associated with a lower cost of debt, reflecting enhanced auditor efficiency and improved audit quality; whereas, long auditor tenures increase the cost of debt, indicating a potential decline in auditor independence and objectivity over time. Moreover, the moderating effect of Big4 audit firms is significantly negative, suggesting that their reputation and audit quality mitigate information asymmetry and reduce financing costs. The findings provide valuable implications for regulators, policymakers, and firms regarding auditor rotation policies as well as the selection of reputable audit firms to ensure sustainable financial credibility and cost efficiency.