Can audit effort (hours) reduce a firm’s cost of capital? Evidence from South Korea

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Mali, Dafydd ORCID: https://orcid.org/0000-0003-3582-2429 and Lim, Hyoung-joo (2021) Can audit effort (hours) reduce a firm’s cost of capital? Evidence from South Korea. Accounting Forum, 45 (2). pp. 171-199. ISSN 0155-9982

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Abstract

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
Additional Information:	Publisher Copyright: © 2020 University of South Australia.
Uncontrolled Keywords:	a1,audit demand theory,audit effort,audit supply theory,g1,g3,m1,m4,wacc,accounting,finance ,/dk/atira/pure/subjectarea/asjc/1400/1402
Faculty \ School:	Faculty of Social Sciences > Norwich Business School
Related URLs:	http://www.scopus.com/inward/record.url?... https://shura.shu.ac.uk/27788/
Depositing User:	LivePure Connector
Date Deposited:	23 Aug 2024 08:30
Last Modified:	25 Sep 2024 18:03
URI:	https://ueaeprints.uea.ac.uk/id/eprint/96336
DOI:	10.1080/01559982.2020.1848347

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