Audit Effort and Stock Price Crash Risk

Author:

Han Xiaomei1,Luo Wei2,Wu Liansheng3,Zhou Wei4

Affiliation:

1. Nanjing University of Science and Technology China

2. Peking University China

3. Southern University of Science and Technology China

4. Southwestern University of Finance and Economics China

Abstract

We examine how stock price crash risk is affected by audit effort, as measured by audit hours. Using a unique dataset of audit hours in China, we find that audit effort is negatively related to crash risk. The negative impact of audit effort on crash risk is more pronounced for listed firms that have higher inherent risks and weaker external monitoring of their information environment. Our findings are robust to various tests, including a two‐stage regression analysis, controlling for listed firm‐fixed effects and audit firm‐fixed effects, and using alternative measures of crash risk. In addition to audit output measures, audit effort has an incremental influence on crash risk. The effects of audit effort on crash risk continue to hold after controlling for auditor industry expertise and auditor tenure.

Publisher

Wiley

Subject

Accounting

Reference62 articles.

1. Stock price synchronicity, crash risk, and institutional investors

2. Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections

3. (forthcoming), ‘The Economic Consequences of Audit Firms’ Quality Control System Deficiencies;Aobdia D.;Management Science.

4. Aobdia D. P.Choudhary andN.Newberger(2019) ‘Which Audit Input Matters? The Benefits and Costs of Audit Engagement Composition’ retrieved from SSRN:https://ssrn.com/abstract=3300277.

5. Auditor Industry Specialization and Earnings Quality

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