Extended auditor disclosure, audit fees, and cost of debt: UK evidence

This study examines the impact of extended auditor disclosure on audit fees. We explore whether these additional disclosures are relevant in the pricing of debt capital for UK firms. Thus, this study sheds new crucial insights on and extends our understanding of the new regulations that mandate more audit disclosure and its consequences. Using an extensive sample of UK firms for a recent time period (2010–2016) in which we cover pre and post substantial structural changes in the audit market regulation; our results are two-fold. First, our findings show that mandating disclosure of additional information such as key audit matters has a significant and positive pressure on audit fees. Second, our results highlight that these additional disclosures have a significant and negative impact on cost of debt. Results are consistent with our theoretical prediction and previous research, suggesting that extended auditor disclosure can reduce the information gap between managers and debt providers. Our results have significant implications for audit firms, audit committees, and policy makers.