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Audit Effort and Stock Price Crash Risk

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  • Xiaomei Han
  • Wei Luo
  • Liansheng Wu
  • Wei Zhou

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.

Suggested Citation

  • Xiaomei Han & Wei Luo & Liansheng Wu & Wei Zhou, 2023. "Audit Effort and Stock Price Crash Risk," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 230-257, March.
    • Handle: RePEc:bla:abacus:v:59:y:2023:i:1:p:230-257
    DOI: 10.1111/abac.12281
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