An analysis of the effect of audit effort (hours) on stock price volatility: Evidence of increasing demand reducing uncertainty

This study uses unique South Korean data to demonstrate whether the public disclosure of audit hour (effort) information influences investor sentiment, proxied by stock price volatility. Over the 2005–2018 sample period, empirical results show that clients that secure increasing levels of audit hours enjoy lower stock price volatility. Furthermore, incrementally higher levels of audit hours reduce stock price volatility to a greater extent for Big4 clients, compared to Non-Big4 clients. Results are consistent after performing various additional tests including endogeneity, fixed/year effects, and after controlling for the audit fee premium effect. The aforementioned findings are interpreted from an audit demand theory perspective. More specifically, following South Korea’s unique audit hour disclosure policy, market participants can make audit quality assertions using audit hour information, which influences investment/disinvestment speculation. Given that audit hour information reporting is rare internationally, the results have important audit policy and business planning implications.