Audit Committee’s characteristics and the cost of debt

Abstract

Abstract - Objective: This paper examines the association between audit committee characteristics and the cost of debt, with the aim of gaining new insights on how this corporate governance mechanism contributes to the reduction of debt costs. Methodology: Using a sample of FTSE 100 companies listed in 2018 and 2019, our study investigates how audit composition and characteristics, such as financial and industry expertise, gender, tenure and diligence affect audit committees’ oversight role, and therefore the impact on the companies’ level of risk and the cost of debt. Findings: The results show that overall audit committee’s characteristics do not impact the corporate cost of debt, except for the gender of the audit committee’s chair. Companies with audit committees managed by a chairwoman experience a lower cost of debt. The results also confirm that external auditors influence the cost of debt. As additional test, we conducted a principal component analysis to construct a corporate governance index of audit committee´s characteristics, and we obtained similar results. Overall, the study results seem to suggest that the cost of debt is more significantly influenced by external auditors than by the characteristics of the audit committee. Value Added: This paper contributes to the literature on corporate governance by showing how audit committees characteristics affect the cost of debt. Recommendations: This study improves the understanding of the way debtholders may assess audit committee’s characteristics and auditors when assessing companies’ financial risk and the corporate cost of debt.