Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

We examine whether firms with higher relative efficiency (operational performance) require additional audit effort (hours) to signal audit quality to demonstrate that their financial reporting systems are robust. Therefore, we use a Korean sample of publicly listed firms because of the Korean audit hour policy which mandates that audit hour information be made available for market participants. We find that client firms with higher relative efficiency have higher audit hours, suggesting that management has an incentive to demand additional audit hours for signalling purposes, and that shareholders, amongst other stakeholders, have an incentive to demand external monitoring to reduce potential agency problems. The results show that relative efficiency is a unique measure of firm performance that can provide insights into a client firm's business and audit risk. We also find evidence suggesting that audit firms do not subject clients to a fee (fee per hour) premium based on relative efficiency, supporting our finding that client firms require audit effort for signalling purposes. Thus, our results have important implications for policymakers about audit effort demand

Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

We examine whether firms with higher relative efficiency (operational performance) require additional audit effort (hours) to signal audit quality to demonstrate that their financial reporting systems are robust. Therefore, we use a Korean sample of publicly listed firms because of the Korean audit hour policy which mandates that audit hour information be made available for market participants. We find that client firms with higher relative efficiency have higher audit hours, suggesting that management has an incentive to demand additional audit hours for signalling purposes, and that shareholders, amongst other stakeholders, have an incentive to demand external monitoring to reduce potential agency problems. The results show that relative efficiency is a unique measure of firm performance that can provide insights into a client firm's business and audit risk. We also find evidence suggesting that audit firms do not subject clients to a fee (fee per hour) premium based on relative efficiency, supporting our finding that client firms require audit effort for signalling purposes. Thus, our results have important implications for policymakers about audit effort demand

Investment Opportunity Set and Voluntary Disclosure of Prospective Information: A Simultaneous Equations Approach

This paper examines empirically the relationship between the level of disclosure of prospective information and the investment opportunity set for firms in New Zealand. Using a systems (two-stage least squares) approach that explicitly controls for potential endogeneity between disclosure and IOS, we find that the level of prospective information disclosure is significantly and positively related to IOS in both specifications in our simultaneous analysis. Further, we document that prospective information disclosure is positively related to firm size and new security offerings, and is not related to inside ownership and firm profitability. IOS is positively impacted by a firm's investments in fixed assets and its profitability. Finally, we find that forward looking disclosure levels are positively related to the proportion of outside directors on the board and negatively related to barriers to entry, but these findings are not robust across alternative model specifications. Copyright Blackwell Publishers Ltd, 2005.