The Relationship between Audit Hours and Stock Price Crash Risk

This study examines the effect of audit hours(e.g., total audit hours, labor mix hours) on the stock price crash risk and then the effect of the related risk on one-year ahead total audit hours and labor mix hours. In this study, we find that the stock price crash risk is significantly and negatively associated with total audit hours and audit hours of registered certified public accountants. Meanwhile, the audit hours of the partners and trainee certified public accountants are not significantly associated with stock price crash risk. Those results are more pronounced for year-end audits rather than interim ones. Moreover, we find that firms and auditors cope with stock price crash risk by increasing total audit hours and/or audit hours of registered certified public accountants. Taken together, this study contributes to relevant research in that from the input-based viewpoints, labor mix hours and the timing of audit have a significant and differential effects on audit quality. The empirical findings of this study provide stakeholders such as shareholder, creditors and regulators with new measure for output-based audit quality indicator. Also, with regard to the adoption of standard audit hours system, this study provides additional evidence and insights for regulators that sufficient audit hours play a critical role in enhancing audit quality.