An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kyung - Tae Kim
University Of Seoul

Abstract: Khurana and Raman (2004) suggest that Big4 audits are related to a lower cost of capital than non-big4 only in the highly litigious country, and suggest litigation risk is an essential element to motivate audit quality. This research tests whether market investors respond to Big4 audit quality differently from non-big4 among Korean firms and the result shows higher quality audits of Big4 in a non-litigious environment. This study examines not only the direct association between Big4 and market response but also the incremental effects of Big4 on market response to earnings quality. The result shows that external investors are not only related to audit quality per se, but also consider audit quality when respond to earnings quality. Moreover, the effects of Big 4 audits are significant in the poor information environment. This means investors' incentive to consider auditor quality increases as investor’s ability to gather information on audited firm decreases.

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