Affiliated former audit partners on audit committees and cost of equity capital

Audit committees (ACs) provide an independent overview of the financial reporting process. Independence and accounting expertise are essential for an effective AC. Due to their firm-specific accounting expertise, former partners of the current auditors (AFAPs) become prime candidates for AC membership. However, their affiliation poses a threat to independence and there is regulatory restriction on hiring AFAPs into ACs. This thesis examines how investors perceive the presence of AFAPs on ACs by examining the association between their presence on ACs and the return investors demand for their investment. Contrary to regulatory belief, I find investors perceive AFAPs on ACs positively.