DO ABNORMAL AUDIT HOURS MEAN AUDIT EFFORT OR INFORMATION RISK?

Using 3,520 firm-year samples from 2002 to 2015 in Korean audit market, this study investigates the relationship between abnormal audit hours and cost of equity capital. Although prior research suggests abnormal audit hours reflect auditors’ effort and show positive relation with financial reporting quality, we find positive association between abnormal audit hours and cost of equity capital. This implies investors regard those as information risk which there might exist accounting issues such as auditor-client disagreements rather than auditors’ endeavor. We also find that this relationship is more prominent in company with positive abnormal audit hours and with large portion of quality review hours implying auditors’ over input is major source of investors’ concern about financial statement credibility. Results of this study contribute to the extant literature by showing expanded evidence on whether investors’ response to abnormal audit efforts as information risk source.