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Can audit effort (hours) reduce a firm’s cost of capital? Evidence from South Korea by Mali, Dafydd (author);Lim, Hyoung-joo (author) is a Business, Management and Accounting article available to read on EtoBox.

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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/noninvestment 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.

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

Author

Mali, Dafydd (author);Lim, Hyoung-joo (author)

Publisher

Elsevier Science; Informa UK (Taylor & Francis); Elsevier Ltd; Informa UK Limited; Wiley (ISSN 0155-9982)

Published

2020

Language

EN

Field

Business, Management and Accounting (Social Sciences)