Financial Reporting Quality in South Korea : The Role of Investor Sentiment and Audit Quality Under Uncertainty

We investigate whether financial reporting quality is associated with economic policy uncertainty and examine the moderating roles of investor sentiment and audit quality during periods of high uncertainty. This study focuses on firms listed on the Korea Stock Exchange over the period 1995-2021. The empirical result provides supports for the hypothesis suggesting that Korean economic policy uncertainty is positively associated with financial reporting quality, indicating that managers have incentive to reduce earnings management when economic policy uncertainty increases. In addition, the statistical analyses indicate that financial reporting quality is higher during low investor sentiment periods, suggesting that managers have incentives to provide high quality of financial reporting when investors are in bearish sentiment so as to reverse this pessimistic mood. The results of multivariate analysis also suggest that there is positive association between financial reporting quality and audit quality, indicating that firms increase the perceived quality of audits in order to increase the quality of financial reporting during periods of high uncertainty. This research may have implications for regulatory authorities and financial market participants who are working on improving financial reporting quality in their countries on periods of high uncertainty