This study examines how audit tenure affects the cost of capital in publicly traded Brazilian firms. The study focuses on a setting with mandatory auditor rotation, allowing the analysis of whether longer audit relationships still offer benefits under such regulatory constraints.
The sample comprises 247 listed firms and 1,329 firm-year observations from 2016 to 2023. A two-step System GMM estimator is employed to address endogeneity and ensure robust results.
Results indicate an incomplete U-shaped relationship between audit tenure and cost of equity, suggesting initial benefits from a longer mandate that eventually stabilise. No significant relationship is found between audit tenure and the cost of debt. These findings support the effectiveness of Brazil's mandatory rotation in balancing independence and audit quality.
The results help inform policymakers in countries with newly implemented rotation policies. The evidence suggests that auditor familiarity, even under rotation, may lower equity capital costs, benefiting firms, investors, and capital markets.
This study contributes by evaluating audit tenure in a country with over 2 decades of mandatory firm and partner rotation. Unlike jurisdictions that adopted similar rules recently (e.g. Argentina, China, EU, Mexico, South Korea and Australia), Brazil offers a mature setting for analysis. The study sheds light on how tenure affects equity and debt costs in such environments.
