MALI, Dafydd and LIM, H.J. (2020). Can audit effort (hours) reduce a firm’s cost of capital? Evidence from South Korea. Accounting Forum, 1-29.
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Abstract
© 2020 University of South Australia. In this paper, we examine the relationship between audit effort measured as audit hours and a firm’s weighted average cost of capital (WACC). Using a sample of Korean listed firms, we hypothesise a potentially bi-directional relationship between WACC and audit effort based on audit “supply”/audit “demand” theory. We find that after controlling for known determinants of firm risk, additional audit hours reduce a firm’s WACC. In our additional analysis, we continue to find that WACC reduces with audit hours based on risk partitioning for (i) Big4 clients/investment grade (IG) firms and (ii) NonBig4 clients/non-investment grade (NIG) firms. However, we find the reduction in WACC occurs at a lower rate for the less risky group compared to the riskier group. We interpret that market participants consider Big4 clients/IG firms to have lower risk, and thus, the marginal effect of greater audit hours in enhancing audit quality (reducing audit risk) is lower for Big4 clients/IG firms compared to NonBig4 clients/NIG firms. Taken together, our findings consistently demonstrate that audit hours (effort) reduce WACC based on audit hours signalling audit quality to market participants.
Item Type: | Article |
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Uncontrolled Keywords: | 1501 Accounting, Auditing and Accountability; Accounting |
Identification Number: | https://doi.org/10.1080/01559982.2020.1848347 |
Page Range: | 1-29 |
SWORD Depositor: | Symplectic Elements |
Depositing User: | Symplectic Elements |
Date Deposited: | 14 Dec 2020 17:38 |
Last Modified: | 28 May 2022 01:18 |
URI: | https://shura.shu.ac.uk/id/eprint/27788 |
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