Auditor-Provided Tax Nonaudit Services and the Implied Cost of Equity Capital

Abstract

Although the Sarbanes-Oxley Act of 2002 (SOX) banned most nonaudit services (NAS), it did not restrict auditors from providing tax NAS to their audit clients. In the post-SOX period, regulators and investors are highly concerned about the increase in tax NAS and consequently calling for restrictions. The profession contends that tax NAS are beneficial to the audit and opposes limitations. We contribute to this ongoing debate and fill a void in the literature by examining investors’ perception of auditor-provided tax NAS, as reflected in the implied cost of equity capital. Our results suggest that investors require higher cost of equity capital for clients that generate more tax NAS revenue f..