Volume 27 Issue 1 Article 1 March 2025 In the Eye of the Storm: Investor Sentiment and Audit Quality in In the Eye of the Storm: Investor Sentiment and Audit Quality in Korean Financial Reporting Korean Financial Reporting Antonios Persakis University of Thessaly, Department of Accounting and Finance, Larisa, Greece, apersakis@uth.gr Georgios Kolias University of Ioannina, Department of Accounting and Finance, Ioannina, Greece Follow this and additional works at: https://www.ebrjournal.net/home Part of the Accounting Commons, Corporate Finance Commons, and the Finance and Financial Management Commons Recommended Citation Recommended Citation Persakis, A., & Kolias, G. (2025). In the Eye of the Storm: Investor Sentiment and Audit Quality in Korean Financial Reporting. Economic and Business Review, 27(1), 1-24. https://doi.org/10.15458/ 2335-4216.1350 This Original Article is brought to you for free and open access by Economic and Business Review. It has been accepted for inclusion in Economic and Business Review by an authorized editor of Economic and Business Review. ORIGINAL ARTICLE In the Eye of the Storm: Investor Sentiment and Audit Quality in Korean Financial Reporting AntoniosPersakis a, * ,GeorgiosKolias b a University of Thessaly, Department of Accounting and Finance, Larisa, Greece b University of Ioannina, Department of Accounting and Finance, Ioannina, Greece Abstract Background and objective: We investigate whether nancial reporting quality is associated with economic policy uncertainty and examine the moderating roles of investor sentiment and audit quality during periods of high uncertainty. Methods: This study focuses on rms listed on the Korea Stock Exchange over the period 1998–2021. We employ a dynamic panel-data model and utilize the Arellano–Bover/Blundell–Bond system estimator, a two-step generalized method of moments estimator that leverages instrumental variables to mitigate the issue of endogeneity. Results: The empirical result provides support for the hypothesis suggesting that Korean economic policy uncertainty is positively associated with nancial reporting quality, indicating that managers have an incentive to reduce earnings management when economic policy uncertainty increases. In addition, the statistical analyses indicate that nancial reporting quality is higher during periods of low investor sentiment, suggesting that managers have incentives to provide high-quality nancial reporting when investors are in a bearish sentiment so as to reverse this pessimistic mood. Conclusion: This research may have implications for regulatory authorities and nancial market participants who are working on improving nancial reporting quality in their countries during periods of high uncertainty. Contribution: The major contribution of our research is its exploration of how economic policy uncertainty in South Korea inuences nancial reporting quality, revealing that increased uncertainty motivates rms to enhance disclosure practices for greater transparency and information accuracy, especially in contexts of bearish investor sentiment and high audit quality. Keywords: Financial reporting quality, Investor sentiment, Audit quality, Economic policy uncertainty JEL classication: M41, G32 1 Introduction I n recent years, there has been growing empirical interest in the impact of economic policy uncer- tainty on economic activities, particularly in relation to nancial reporting quality. This study contributes to this body of literature by examining the moderating effect of economic policy uncertainty on the relation- ship between investor sentiment, audit quality, and the nancial reporting quality in South Korea. The motivations behind this study stem from the unique political and economic characteristics of South Korea, characterized by signicant policy uctuations and external vulnerabilities, which are expected to inu- ence corporate nancial behavior. The signicance of policy uncertainty in economic analysis is well-documented, with Baker et al. (2016) providing an economic policy uncertainty index that has become a cornerstone in subsequent research. This index, based on the frequency of policy-related terms in major newspapers, captures the uncertainty stemming from economic policies. Building on this framework, Cho and Kim (2023) developed an un- certain economic policy framework specic to South Korea, focusing on various policy domains such as Received 24 February 2024; accepted 31 October 2024. Available online 10 March 2025 * Corresponding author. E-mail address: apersakis@uth.gr (A. Persakis). https://doi.org/10.15458/2335-4216.1350 2335-4216/© 2025 School of Economics and Business University of Ljubljana. This is an open access article under the CC BY license (http://creativecommons.org/ licenses/by/4.0/). 2 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 monetary, scal, trade, and debt policies. This frame- work is particularly pertinent given South Korea’s political structure, where signicant executive power resides with the president, often leading to substantial policy shifts during political transitions (Croissant, 2003; Horiuchi & Lee, 2018). The Korean economy’s exposure to global markets and geopolitical tensions, including North Korea’s nuclear activities, exacerbates the impact of economic policy uncertainty on nancial markets (Kim et al., 2019; Pyo, 2021). The country’s export-oriented nature further amplies the effect of global economic con- ditions on domestic policy uncertainty, making it a critical factor in nancial reporting and investor be- havior (Lee, 2018). While extensive research has explored the macroe- conomic implications of economic policy uncertainty, its direct impact on nancial reporting quality re- mains underexplored (Bermpei et al., 2022; Nguyen et al., 2020; Ozili, 2021; Shabir et al., 2022). Pre- vious studies have primarily focused on earnings management as a measure of nancial reporting qual- ity, revealing mixed results concerning the inuence of economic policy uncertainty (Chui & Wei, 2021; Hesarzadeh, 2019). This study hypothesizes that in- creasing economic policy uncertainty in South Korea may incentivize rms to enhance their nancial re- porting quality to mitigate the negative effects of uncertainty. The relationship between investor sentiment and nancial reporting quality is another focal point of this research. Yin and Tian (2017) identied a corre- lation between high investor sentiment and reduced nancial reporting quality, while Ge et al. (2019) sug- gested that rms tend to adopt conservative reporting strategies during periods of heightened sentiment. This study extends these ndings to the South Korean context, examining whether rms improve nancial reporting quality in response to negative investor sen- timent as a trust-building mechanism. Additionally, the role of audit quality in nancial reporting is examined, with prior studies offering varying conclusions. Some research, such as Abbott et al. (2016) and Kaawaase et al. (2021), suggests a pos- itive relationship between internal audit quality and reporting accuracy, while others, such as Carrera et al. (2017), indicate a potential negative impact of audit committee expertise on reporting quality. This study seeks to clarify these mixed ndings by analyzing the specic context of South Korean rms. In summary, this study addresses a signicant gap in the literature by investigating how economic policy uncertainty, investor sentiment, and audit quality collectively inuence the nancial reporting quality in South Korea. The unique economic and political landscape of South Korea offers a compelling case for examining these dynamics, with potential implica- tions for both domestic and international stakehold- ers. Therefore, using a sample of 18,651 rm-year observations in South Korea and incorporating a two-step generalized method of moments estimator in order to address potential endogeneity issues, our ndings align with prior research, revealing a positive association between audit quality and nancial reporting quality. Specically, our results indicate that as the likelihood of restatement and going-concern opinions decreases, nancial reporting quality strengthens, reecting the inuence of expected audit quality on managerial decision making and its subsequent impact on pre-audit nancial reporting. Many scholars assert that heightened uncertainty is associated with increased corporate governance de- ciencies (Johnson et al., 2000; Mishra & Bhattacharya, 2011; Ongsakul et al., 2021), declining audit quality (Kyriakou, 2022; Persakis & Iatridis, 2016), and a bear- ish investor sentiment (Ugurlu-Yildirim et al., 2021). However, an unexplored question remains: Does pol- icy uncertainty moderate the inuence of investor sentiment and audit quality on nancial reporting quality in South Korea? Our study addresses this gap by proposing that the effects of investor senti- ment and audit quality on nancial reporting quality are more pronounced in periods of heightened un- certainty. Our ndings substantiate our hypothesis, revealing that bearish investor sentiment is linked to enhanced information quality when rms main- tain higher audit quality (with a lower likelihood of restatement and going-concern opinions) during un- certain periods. Our paper offers several contributions to the exist- ing literature. Firstly, it contributes to the understand- ing of economic policy uncertainty by investigating its association with nancial reporting quality. No- tably, this study explores the uncharted territory of how investor sentiment and audit quality (measured by restatement likelihood and going-concern opin- ions) inuence nancial reporting integrity. To the best of our knowledge, no prior research has delved into this specic aspect. Secondly, our research enriches the literature on nancial reporting quality in South Korea, building upon the works of Yoo et al. (2013), Lim and Lee (2015), and Key and Kim (2020). Our ndings suggest that increased economic policy uncertainty can lead to heightened government scrutiny and regulation, motivating Korean rms to enhance nancial report- ing quality to meet regulatory demands and reassure investors. Thirdly, we enhance the rigor and credibility of our research by incorporating additional measures ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 3 for both dependent and independent variables. This approach ensures that our conclusions are robust and not overly dependent on specic decisions made dur- ing uncertain times. Fourthly, our study breaks new ground by com- prehensively analyzing the subtypes of uncertainty indices developed by Cho and Kim (2023) related to scal, exchange rate, trade, and monetary uncertain- ties in South Korea. Therefore, we also examine the geopolitical risk index proposed by Seungho et al. (2021), which offers a more global perspective and considers factors such as political stability, conict risk, international relations, and geopolitical events. This additional metric could provide valuable in- sights for businesses and investors operating in a global context. Lastly, our research contributes to the broader conversation by focusing on an emerging market, South Korea, which has established robust regula- tory bodies and made efforts to harmonize accounting standards with the International Financial Report- ing Standards (IFRS). South Korea’s experience in this regard can serve as a valuable example for other emerging nations seeking to strengthen their nancial reporting framework. Additionally, South Korea’s measures to enhance auditor autonomy and supervision, including regulations related to audit committees, auditor rotation, and transparency, can provide a blueprint for improving nancial reporting quality in other countries. The remainder of the paper is organized as follows: Section 2 briey reviews the literature on nancial re- porting quality, investor sentiment, and audit quality, and the hypotheses for their development are pro- vided. The research design is discussed in Section 3. Section 4 reports the data and the empirical ndings. Section 5 focuses on additional analysis and sensi- tivity tests related to nancial reporting quality. We conclude in Section 6. 2 Literature review and hypotheses development 2.1 Economic policy uncertainty in South Korea The economic policy uncertainty index for South Korea, as developed by Cho and Kim (2023), pos- sesses distinct characteristics. Firstly, South Korea’s political system generates higher uncertainty lev- els compared to established democracies (Croissant, 2003). Moreover, the inuence of the Korean pres- ident on distributive policy, impacting government spending and corporate investment, accentuates this uncertainty (Horiuchi & Lee, 2018). Secondly, South Korea’s economic policy uncertainty index is notably responsive to global economic policy uncertainty due to its strong interconnectedness with international economies (Cho & Kim, 2023; Fontaine et al., 2018; Ozcelebi & Izgi, 2022). Thirdly, South Korea’s eco- nomic policy uncertainty index is vulnerable to vari- ous external shocks, including North Korea’s nuclear weapons testing, which directly affects the South Korean capital market and corporate performance (Ducret & Isakov, 2020; Huh & Pyun, 2018; Kim et al., 2019; Pyo, 2021). In general, we posit that South Korea’s economic policy uncertainty escalates dur- ing signicant political, economic, and geopolitical events, as indicated by Cho and Kim (2023). 2.2 Legal and regulatory environment of nancial reporting in South Korea According to the International Federation of Ac- countants’ 2020 report, South Korea’s nancial report- ing framework is governed by the Korean Commer- cial Act. This legislation mandates the maintenance of company accounts and stipulates that companies meeting specic criteria must undergo nancial state- ment audits. The Korean Commercial Act mandates that listed companies on the Korea Stock Exchange, nancial institutions, and state-owned companies adhere to accounting standards established by the Korean Ac- counting Standards Board. This board has issued the Korea International Financial Reporting Standards, aligning them completely with the International Fi- nancial Reporting Standards without alterations. Ad- ditionally, the Korean Accounting Standards Board formulates the Korean Generally Accepted Account- ing Principles, which serve as local accounting stan- dards applicable to all other companies. The existing literature on nancial reporting qual- ity in South Korea is limited. However, some studies offer insights. Yoo et al. (2013) and Lim and Lee (2015) suggest that rms with high-quality nancial reporting tend to make more protable acquisitions. Kang et al. (2014) uncover a negative correlation between comparability and audit hours, with this impact being less pronounced for rms attracting signicant nancial analyst attention. Kim and Yang (2014) nd a negative relationship between direc- tors’ tenure and discretionary accruals. Lee et al. (2016) report a negative link between the level of related-party transactions and nancial statement comparability. Moreover, Key and Kim (2020) predict and observe an improvement in accounting quality following the adoption of the International Financial Reporting Standards. Given these insights, further investigations are essential to explore variables that may inuence nancial reporting quality in the South Korean context. 4 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 2.3 Financial reporting quality under uncertainty Financial reporting quality serves a crucial role in enhancing the effectiveness of economic decision making by investors. As dened in the 2010 Con- ceptual Framework for Financial Reporting by the IASB, the primary objective of nancial reporting is to provide users with information that aids in de- cisions related to allocating resources to the entity. This information is guided by fundamental quali- tative characteristics, namely relevance and faithful representation, which, in turn, promote comparabil- ity, veriability, timeliness, and understandability. Within the framework of these qualitative charac- teristics, prior literature has predominantly focused on the utility of nancial reporting quality in reducing information asymmetry (Brown & Hillegeist, 2007; Emawati & Budiasih, 2020) and mitigating the ef- fects of uncertainty on the global economy. Chang and Sun (2010) assert that effective investor relations programs can lead to high disclosure quality, yield- ing benets such as increased market exposure, ex- panded analyst coverage, and institutional following. Bhattacharya et al. (2013) and Cerqueira and Pereira (2013) discover a positive correlation between nan- cial reporting quality and information asymmetry. Similarly, Nagar et al. (2019), Ng et al. (2020), Dai and Ngo (2021), and El Ghoul et al. (2021) argue that reporting quality improves in response to height- ened economic policy uncertainty, as managers are incentivized to provide more cautious and voluntary information to mitigate information asymmetry un- der such conditions. El Ghoul et al. (2021) specically nd that managers are less likely to engage in discre- tionary accrual manipulation during periods of rising economic policy uncertainty. Moreover, Nagar et al. (2019), Ng et al. (2020), and Ongsakul et al. (2021) suggest that rms are more inclined to make volun- tary disclosures during uncertain times. Recently, Dai and Ngo (2021) demonstrate that rms tend to bolster their accounting conservatism as a response to the adverse impacts of policy uncertainty surrounding political elections. Conversely, several studies propose that an esca- lation in economic policy uncertainty might actually diminish reporting quality due to the augmented information asymmetry during uncertain periods, leading to the undervaluation of rm performance (Bermpei et al., 2022; Cui et al., 2021; Yung & Root, 2019). Notably, Yung and Root (2019) illustrate that economic policy uncertainty can prompt rms to en- gage in earnings management. Additionally, Bermpei et al. (2022) nd a positive association between increased economic policy uncertainty and discre- tionary accruals. In light of the preceding discussion, the presence of information asymmetry is associated with a decline in nancial reporting quality (Emawati & Budiasih, 2020; Suharsono et al., 2020). Additionally, economic policy uncertainty exacerbates information asymme- try (Wang et al., 2022). However, there remains ambi- guity regarding how uncertainty inuences earnings management, a key indicator of nancial reporting quality. Ng et al. (2020) posit a positive relation- ship between uncertainty and earnings management, while Bu et al. (2020) suggest that managers may cur- tail earnings manipulation in response to heightened economic policy uncertainty, seeking to mitigate the adverse consequences of uncertainty spikes. Overall, prior literature presents mixed empirical evidence. El Ghoul et al. (2021) report an increase in nancial reporting quality when economic pol- icy uncertainty rises, whereas Yung and Root (2019) document the opposite trend. Given these diver- gent ndings and the contentious nature of the relationship between nancial reporting quality and uncertainty, it is reasonable to hypothesize that man- agers would be inclined to enhance the quality of nancial reporting to minimize information asym- metry and mitigate uncertainty, ultimately fostering greater trust in the rm. This hypothesis is further supported by agency theory, developed by Meckling and Jensen (1976), which suggests that during peri- ods of economic policy uncertainty, managers face heightened scrutiny from investors, regulators, and other stakeholders. To avoid potential penalties and maintain their reputation, managers are incentivized to align their reporting practices with the interests of shareholders, leading to higher-quality nancial statements (Tarighi et al., 2022). Additionally, the increased risk aversion that often accompanies un- certain economic environments encourages managers to adopt more conservative accounting practices, fur- ther improving nancial reporting quality (Gigler & Hemmer, 2001; Hu & Jiang, 2019). Stronger gover- nance mechanisms implemented during uncertain times also serve to limit managerial discretion, en- suring greater transparency and accuracy in nancial reporting (Bushman, 2016). Therefore, we formulate our main empirical hypothesis (H1) as follows: H1. An increase in economic policy uncertainty leads to an improvement in the quality of nancial reporting. 2.4 Financial reporting quality and investor sentiment under uncertainty Although extensive literature exists on the re- lationship between nancial reporting quality and investment, no prior evidence addresses how investor ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 5 sentiment impacts nancial reporting quality amid uncertainty. In uncertain environments, nancial markets experience abrupt price uctuations. Zhang (2019) delves into the connection between economic policy uncertainty and investor sentiment, reveal- ing the pronounced inuence of economic policy uncertainty on sentiment. This phenomenon can be explained by real option and nancial constraint theories. Nartea et al. (2020) examine the hypoth- esis that the economic policy uncertainty premium is more signicant (or weaker) in periods of low (or high) investor sentiment. Their ndings suggest that investors may be willing to pay elevated prices for stocks with positive uncertainty beta while de- manding additional compensation to hold stocks with negative beta, but only during low sentiment periods. Kim et al. (2021) explore the intricate dy- namics between information uncertainty, sentiment, analyst recommendations, and stock returns. Their study concludes that investor sentiment signicantly explains stock market reactions when information uncertainty is high. Qi et al. (2022) investigate the dynamic relationship between economic policy un- certainty, investor sentiment, and nancial stability across various periods and time points. Their empir- ical results highlight the evident negative impact of economic policy uncertainty on investor sentiment. Ramalingegowda et al. (2013) demonstrate that the negative impact of dividends on investment can be alleviated by the quality of nancial reporting. No- tably, this mitigation effect is more pronounced in rms that reduce dividends rather than those that increase them. Yin and Tian (2017) establish a positive relationship between investor sentiment and future stock price cash risk, particularly in cases of weaker - nancial reporting quality. Houcine (2017) underscores that nancial reporting quality plays a positive role in enhancing investment efciency by mitigating both underinvestment and overinvestment. Additionally, Yin and Tian (2017) observe a positive association between investor sentiment, future stock price crash risk, and poorer nancial reporting quality, with short-sale constraints strengthening this relationship. Hales (2018) and Chen et al. (2018) provide evidence that countries with higher nancial reporting quality and more extensive disclosure practices exhibit less pronounced effects in the face of political uncertainty. Furthermore, prior research has delved into the inuence of market sentiment on investment ef- ciency. For instance, Gallimore and Gray (2002) assert that investor sentiment plays a pivotal role in prop- erty investment decisions. Grundy and Li (2010) empirically demonstrate a signicant and positive re- lationship between optimism and investment levels. Alimov and Mikkelson (2012) note that rms going public during favorable sentiment periods tend to allocate substantially more resources to investments, particularly acquisitions, than those going public in different periods. Arif and Lee (2014) align with the business cycle literature, highlighting that corporate investments reach their peak during periods charac- terized by positive sentiment. Additionally, McLean and Zhao (2014) reveal that investment behavior ex- hibits lower sensitivity to Tobin’s q and heightened sensitivity to cash ow during economic recessions and periods of subdued investor sentiment. In light of the previously mentioned studies, it is evident that economic uncertainty has a signi- cant impact on investor sentiment, affecting compa- nies’ investment decisions and nancial constraints, thereby inuencing investor psychology and stock market outcomes (Zhang, 2019). Rao et al. (2017) em- phasize that investors with negative future outlooks can lead businesses to postpone or reduce their in- vestments, thereby diminishing the effectiveness of policies. Consequently, economic uncertainty tends to exert a negative inuence on investor sentiment (Kim et al., 2021; Qi et al., 2022). Moreover, existing literature provides evidence of the direct inuence of investor sentiment and - nancial reporting quality on investment efciency. Grundy and Li (2010) and Alimov and Mikkelson (2012) demonstrate a signicant and positive rela- tionship between optimism and investment levels. Chen et al. (2011), Yin and Tian (2017), and Houcine (2017) underscore the positive relationship between nancial reporting quality and enhanced investment efciency, achieved by mitigating both underinvest- ment and overinvestment. Despite the growing body of literature exploring the impact of nancial reporting quality and investor sentiment on investment, as well as how uncertainty affects nancial reporting quality and investor sen- timent, there remains a gap in understanding how investor sentiment may inuence nancial reporting quality during periods of uncertainty. Thus, we posit that nancial reporting quality will be higher during periods of low investor sentiment, and the effect of investor sentiment on nancial reporting quality will be more pronounced for rms facing higher uncer- tainty. In essence, we anticipate that managers will be incentivized to provide high-quality nancial re- porting when investors exhibit bearish sentiment in order to counteract this pessimistic mood. This expec- tation aligns with agency theory, which suggests that increased monitoring and scrutiny by investors in bearish markets lead to enhanced nancial reporting as managers strive to reduce information asymme- try and avoid the heightened risks of opportunistic behavior (Armstrong et al., 2010; Arnold & De Lange, 6 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 2004). Additionally, even in the context of economic policy uncertainty, the demand for reliable informa- tion is amplied, prompting managers to prioritize accuracy and transparency in their reporting to main- tain investor condence and protect their reputations. Building on these arguments, we extend our main hypothesis as follows: H2. Financial reporting quality is higher when investor sentiment is bearish, even if economic policy uncertainty is greater. 2.5 Financial reporting quality and audit quality under uncertainty The literature extensively examines the impact of audit quality on nancial reporting quality, but these ndings remain subject to debate. Specically, previous evidence suggests a signicant association between internal audit quality and nancial report- ing quality (Bananuka et al., 2018; Kaawaase et al., 2021). Johl et al. (2013) and Abbott et al. (2016) assert that internal audit quality, comprising com- petence and independence, is a crucial factor in effective internal audit function monitoring of - nancial reporting, ultimately leading to improved nancial reporting quality, as indicated by abnormal accruals. Additionally, research by Burrowes and Hendricks (2005), Badolato et al. (2014), and He and Yang (2014) highlights that audit committees with nancial exper- tise are considered advantageous, leading to reduced earnings management and higher-quality earnings reporting. However, in contrast, Carrera et al. (2017) demonstrate that increasing the proportion of audit committee members with nancial accounting exper- tise is associated with decreased nancial reporting quality. Arnedo et al. (2008) and Omid (2015) establish a strong positive relationship between the total value of discretionary accruals and the likelihood of receiv- ing a qualied audit opinion. Similarly, Etemadi et al. (2013) propose that distressed companies, compelled by the audit opinion, resort to conservative prot re- porting methods, leading to qualied audit opinions that place greater emphasis on managerial caution in earnings decisions. Contrastingly, Gajevszky (2014) and Taktak and Mbarki (2014) present ndings in- dicating that the likelihood of prot manipulation decreases when qualied audit reports are issued. In contrast, despite uncovering a negative relationship between accruals and audit opinion modications tied to going-concern opinions, Herbohn and Ragu- nathan (2008) and Tsipouridou and Spathis (2014) do not nd evidence supporting managers’ exploitation of uncertainty regarding asset benets or provisions for liabilities to manipulate results in order to meet short-term earnings benchmarks. A related area of research explores how companies respond to diminished credibility following restate- ments (Blankley et al., 2012; Francis et al., 2013). Previous studies consistently reveal that restating rms experience a decline in earnings quality dur- ing the restatement years, with restatements carrying signicant adverse repercussions for a rm’s nan- cial reporting (Dechow et al., 2011; Desai et al., 2006). Desai et al. (2006) identify extreme accruals in restate- ment years, underscoring the poor accrual quality in such periods. Dechow et al. (2011) further empha- size that earnings quality is lower during years of misstatement compared to non-misstatement years. In contrast, Wiedman and Hendricks (2013) contend that rms strive to demonstrate progress, and they observe a signicant enhancement in accrual quality after a restatement. Limited prior research explores the implications of uncertain periods on audit quality, with only two studies directly addressing the impact of economic policy uncertainty on audit quality (Cui et al., 2021; Zhang et al., 2018). Zhang et al. (2018) suggest that as economic policy uncertainty escalates, audit quality improves. Conversely, Cui et al. (2021) present ev- idence that greater exposure of Chinese companies to economic policy uncertainty leads to heightened earnings management, indicating lower-quality audit services during times of heightened uncertainty. This degradation in audit quality suggests reduced audit effort, possibly linked to companies’ strategies of en- gaging less qualied auditors when facing increased risk (Cui et al., 2021). Additionally, previous literature examines specic adverse events that amplify uncertainty, such as the Global Financial Crisis of 2008, and their inuence on audit quality. Sikka (2009) and Xu et al. (2011, 2013) report a signicant rise in rms receiving audit reports modied due to going-concern assumptions during the Global Financial Crisis compared to the pre-crisis period. Iatridis and Dimitras (2013) nd that Greek companies audited by Big Four auditors tended to produce higher-quality nancial statements prior to the 2008–2011 economic crisis. Persakis and Iatridis (2016) note a decline in audit quality dur- ing the Global Financial Crisis. Shahzad et al. (2018) provide robust evidence of increased perceived audit quality for U.S. rms, both nancial and nonnan- cial, during the Global Financial Crisis. Moreover, Chen et al. (2019) report decreased audit fees during the crisis due to auditor pressure on clients, possi- bly affecting audit quality. Similarly, Kyriakou (2022) observes that auditors were inclined to deliver higher ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 7 audit quality to nonnancial rms during the Global Financial Crisis. In light of the prior literature gaps regarding the in- uence of audit quality on nancial reporting quality during uncertain periods and the effects of specic adverse events on audit quality, this study aims to address these questions. Building on insights from Kamolsakulchai (2015), it is anticipated that rms will take measures to enhance the perceived quality of audits in an effort to elevate the overall quality of nancial reporting. This expectation aligns with agency theory, which posits that high audit quality plays a critical role in mitigating information asym- metry, reducing moral hazard, and enhancing the monitoring and accountability of management (Bacha et al., 2021; Tessema, 2020). These mechanisms are particularly vital during periods of economic policy uncertainty, when the risks of nancial misreport- ing are heightened. High audit quality, by providing rigorous scrutiny and ensuring accurate nancial statements, helps align the interests of agents and principals, thereby maintaining trust and reducing agency costs. Thus, considering the potential inter- play between audit quality and nancial reporting quality, we propose a third hypothesis as follows: H3. Financial reporting quality is higher when audit qual- ity is higher, even if economic policy uncertainty is greater. Overall, the aforementioned analysis indicates that economic policy uncertainty signicantly impacts - nancial reporting quality, suggesting that heightened uncertainty incentivizes rms to enhance the nan- cial reporting quality. This nding aligns with the agency theory, which posits that during periods of uncertainty, managers face increased scrutiny from investors and regulators, prompting them to adopt more conservative and transparent reporting prac- tices to maintain credibility and trust (Meckling & Jensen, 1976; Tarighi et al., 2022). This has important implications for policymakers, who should consider the role of economic policy stability in fostering high nancial reporting quality. By reducing economic policy uncertainty, governments can create an envi- ronment where rms are less pressured to engage in earnings management, thereby improving the overall transparency and reliability of nancial statements (Bu et al., 2020; El Ghoul et al., 2021). Furthermore, the relationship between investor sentiment and audit quality under conditions of eco- nomic policy uncertainty highlights the importance of maintaining high audit standards, especially dur- ing periods of market pessimism. Previous empirical research suggests that bearish investor sentiment is associated with improved nancial reporting qual- ity, as managers are motivated to counteract negative market perceptions through more diligent and trans- parent reporting (Qi et al., 2022; Yin & Tian, 2017). Additionally, higher audit quality appears to amplify this effect, underscoring the critical role of external audits in safeguarding nancial integrity during un- certain times (Kamolsakulchai, 2015; Tessema, 2020). For regulatory bodies and auditing rms, this implies a need to reinforce audit practices and ensure robust oversight mechanisms are in place to support rms in delivering accurate and reliable nancial information, particularly when market conditions are unfavorable. 3 Sample selection and empirical methods 3.1 Sample and data This study focuses on rms listed on the Korea Stock Exchange (KRX) 1 for the period spanning 1998–2021, as documented in the Thomson Reuters Datastream. Following established research conventions, nancial institutions such as banks, insurance companies, and stock trading agencies are excluded from the sample due to their distinct liability and capital structures compared to nonnancial rms. Moreover, observations featuring negative book values and missing data are also removed, resulting in a nal sample size of 25,427 rm-year observations encompassing 2,412 rms listed on the KRX. Additionally, to mitigate the impact of outliers, a winsorizing process is applied, trimming 1 percent from each tail of the distribution for continuous variables in the dataset. 3.2 Measure of nancial reporting quality as dependent variable To ensure the relevance and accuracy of nancial information in aiding investors and creditors in their decision-making processes, it is imperative that - nancial reporting quality is appropriately assessed. However, the absence of a universally accepted metric for nancial reporting quality has led to the utilization of various alternative measures in previous studies, including accruals quality, abnormal accruals, earn- ings management, discretionary accruals, accounting conservatism, real earnings management, likelihood of misstatements, likelihood of material weaknesses 1 The KRX has three market divisions: the Korea Composite Stock Price Index (KOSPI), the Korean Securities Dealers Automated Quotations (KOSDAQ), and the Korea New Exchange (KONEX). 8 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 Fig. 1. Economic policy uncertainty index of South Korea calculated by Cho and Kim (2023). in internal control, and audit fees, among others (De- chow et al., 2010; Hairston & Brooks, 2019). In this research, we gauge nancial reporting qual- ity using the earnings quality indicator provided by the StarMine database, a choice consistent with the approach taken by Abdelsalam et al. (2021). There are several compelling reasons for adopting this measure. Firstly, StarMine’s earnings quality model comprises components that encompass cash ows, accruals, op- erating efciency, and exclusions, which are adjusted for beta, as identied by Mathuva and Nyangu (2022). Secondly, according to Abdelsalam et al. (2021), StarMine’s earnings quality model assigns percentile ratings ranging from 1 to 100, assessing the reliabil- ity and consistency of a company’s past earnings. Notably, it compares a company’s earnings quality with others trading on the same exchange and sub- ject to the same regulatory authority. This feature is particularly valuable as it facilitates the direct evalu- ation of a rm’s earnings quality relative to its peers (Abdelsalam et al., 2021). Thirdly, the composition of this multi-factor earnings quality model is designed to assign higher scores to companies whose earnings are supported by sustainable sources such as cash ows, while penalizing those reliant on less sustain- able sources such as accruals (Abdelsalam et al., 2021). Consequently, higher values of StarMine’s earnings quality correspond to greater nancial reporting qual- ity (FRQ it ). 3.3 Measures of policy uncertainty, investor sentiment, and audit quality as independent variables Concerning policy uncertainty, we employ the economic policy uncertainty index established by Baker et al. (2016). However, for economic policy uncertainty specic to South Korea, we utilize an index crafted by Cho and Kim (2023), drawing in- spiration from Baker et al. (2016) and relying on prominent Korean newspapers as data sources. Fig. 1 illustrates the trajectory of the Korean economic pol- icy uncertainty index. Fig. 1 illustrates noteworthy spikes in Korean economic policy uncertainty, each corresponding to specic events. The 1998 spike coincides with the Asian Financial Crisis, while elevated uncertainty in 2003 and 2004 results from Gulf War II concerns and a constitutional-court-overturned impeachment, re- spectively. The index surges again during the Global Financial Crisis in 2008. Subsequent spikes in 2011, 2016, 2019, and 2020 are linked to Eurozone anxi- eties, Chinese stock market turbulence, North Korea’s nuclear test, the Korea–Japan trade dispute, and the COVID-19 pandemic, respectively. Additionally, do- mestic political events, such as presidential elections and impeachments, trigger uctuations in Korean economic policy uncertainty. These include the elec- tions of Presidents Roh Moo-hyun (2002), Lee Myung- bak (2007), Park Geun-hye (2012), and Moon Jae-in (2017), as well as the impeachments of Presidents Roh Moo-hyun (2004) and Park Geun-hye (2016), often amid political scandals. In this study, we utilize the annual economic policy uncertainty index as per the methodology employed by Gulen and Ion (2016), El Ghoul et al. (2021), and Kim and Yasuda (2021). To be precise, we dene Korean economic policy uncertainty (KEPU It ) in ac- cordance with Cho and Kim’s (2023) approach, which involves taking the natural logarithm of the average value of the policy uncertainty index throughout a scal year’s 12-month period. Black (1986) characterizes investor sentiment as the “noise” present in nancial markets, while Baker and Wurgler (2006) dene it as the inclination of investors to speculate or their optimism (or pessimism) regard- ing stocks. These denitions emphasize sentiment as the prevailing attitude among investors towards specic securities or the overall market (Chau et al., ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 9 2016). To align with these conceptualizations, we employ rm- and market-level investor sentiment, following the approach of Anusakumar et al. (2017). Specically, we use trading volume as a proxy for sentiment, a method supported by Liao et al. (2011), Baker and Wurgler (2006), and Chen et al. (2013). Baker and Stein (2004) argue that an increase in trad- ing volume signies a heightened level of investor sentiment. Following Liao et al. (2011) and Anusakumar et al. (2017), rm- (FSentiment it ) and market-level investor sentiments (MSentiment It ) are computed as follows: FSentiment it D log (FV it ) log (FV it 1 ) (1) MSentiment It D log (MV It ) log (MV It 1 ) (2) FV it is the rm trading volume; MV It is the market trading volume. Higher values of equations Eqs. (1) and (2) mean higher investor sentiment (bullish attitude). In line with prior research, we employ two distinct metrics to assess audit quality: the probability of a - nancial statement restatement (PrFSR it ) and the prob- ability of a going-concern opinion (PrGCO it ). We opt for restatements as a proxy for audit quality, consis- tent with their widespread use in the literature (Heo et al., 2021; Jiang et al., 2015; Notbohm & Valencia, 2021). Moreover, restatements are chosen over other audit quality indicators (such as abnormal and dis- cretionary accruals) due to their clear association with audit quality, which makes them a straightforward measure of poor audit quality (Notbohm & Valencia, 2021). Conversely, the use of discretionary accruals as an audit quality gauge has faced criticism due to its dependence on the quality of the accruals model em- ployed (Paterson & Valencia, 2011). For these reasons, our rst proxy for audit quality is the probability of a nancial statement restatement (PrFSR it ), represented as a binary variable with a value of one (1) indicating a restatement and zero (0) otherwise. Rajgopal et al. (2021) emphasize the importance of employing multiple audit quality metrics to examine various aspects of audit quality. Consequently, we utilize the issuance of going-concern opinions as a second measure of audit quality. This choice is sub- stantiated by its frequent use as an audit quality proxy in numerous studies (Chen et al., 2018; Notbohm & Valencia, 2021). Additionally, as noted by Chen et al. (2018), the decision to issue a going-concern opinion is primarily driven by the auditor, rendering it a rea- sonable indicator of audit quality. In a similar vein, Notbohm and Valencia (2021) argue that the proba- bility of a going-concern opinion captures a distinct set of audit quality attributes compared to the prob- ability of restatement. Hence, our second proxy for audit quality is the probability of a going-concern opinion (PrGCO it ), operationalized as a binary vari- able with a value of one (1) denoting the receipt of a going-concern modied audit opinion and zero (0) otherwise. 3.4 Control variables Drawing from prior research, we incorporate sev- eral rm-level control variables in our analysis, in- cluding rm size, rm leverage, rm liquidity, rm protability, board size, board independence, board duality, rm age, rm growth, asset tangibility, and ownership structure. Firm leverage (FLEV it ) is measured by the debt- to-equity ratio, calculated as total liabilities divided by total shareholders’ equity. The literature presents divergent views on the relationship between rm leverage and nancial reporting quality. One per- spective suggests that rms with higher debt levels tend to disclose more information to meet credi- tor demands (Bimo et al., 2019; Echobu et al., 2017; Mahbound, 2017). Conversely, another body of re- search provides substantial evidence of a negative association between nancial leverage and nancial reporting quality (Kwanbo, 2020; Tang et al., 2016). These ndings challenge the agency cost theory and suggest that heavily leveraged rms may disclose less public information. Furthermore, a few prior studies report an insignicant link between nancial leverage and nancial reporting quality (Hassan et al., 2022; Rajab & Schachler, 2009). Firm liquidity (FLIQ it ) is assessed using the current ratio, computed as current assets divided by current liabilities. Existing research presents differing views on the relationship between rm liquidity and nan- cial reporting quality. Some studies, including Hassan and Farouk (2014), Echobu et al. (2017), and Hassan et al. (2022), suggest that rms with higher liquidity are more motivated to provide high-quality earnings information. Conversely, Shehu and Ahmad (2013), Shehata et al. (2014), and Hassan et al. (2022) argue that rms with low liquidity may also disclose more information to demonstrate management’s aware- ness of the rm’s position and to mitigate shareholder claims. Furthermore, Kwanbo (2020) and Aljifri et al. (2014) nd no signicant relationship between rm liquidity and nancial reporting quality. Firm protability (FP it ) is measured by return on equity, calculated as net income divided by the book value of equity. The relationship between rm prof- itability and nancial reporting quality is vague. Sev- eral studies, including Uyar et al. (2013), Fathi (2013), Takhtaei et al. (2014), Soyemi and Olawale (2019), and Kwanbo (2020), suggest that higher rm performance 10 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 is associated with higher-quality nancial informa- tion. This implies that protable rms, with growth prospects, are motivated to provide more reliable information to demonstrate the credibility of their earnings and future projects. In contrast, Prencipe (2004), Monday and Nancy (2016), Ebrahimabadi and Asadi (2016), and Hassan et al. (2022) nd a nega- tive relationship between rm protability and the quality of disclosed information. In other words, protable rms may refrain from leveraging their ad- vantage against competitors, potentially leading to a decrease in the quality of disclosed information. Furthermore, some studies report an insignicant re- lationship between rm protability and nancial reporting quality (Agyei-Mensah, 2013; Haji & Ghaz- ali, 2013; Hosseinzadeh et al., 2014; Tang et al., 2016). Board size (BS it ) is determined by the natural logarithm of the number of directors on the board. The ndings of Echobu et al. (2017) and Hassan et al. (2022) suggest that a larger board size can contribute more expertise and knowledge to the rm, potentially leading to higher-quality nancial reporting. Conversely, Byard et al. (2006) and Ostadhashemi et al. (2017) argue that smaller boards can facilitate improved communication and coordination, resulting in better disclosure quality of accounting information. Additionally, several studies indicate an insignicant correlation between nancial reporting quality and board size (Gerayli et al., 2021; Liu & Sun, 2010; Soheilyfar et al., 2014). Board independence (BI it ) is dened as the proportion of independent non-executive directors on the board. Booth et al. (2002) emphasize the important monitoring role played by executive directors. Most prior research indicates a positive relationship between the presence of outside directors and nancial reporting quality (Abed et al., 2012; Alves, 2011; Siagian & Tresnaningsih, 2011; Waweru & Riro, 2013). In contrast, Dimitropoulos and Asteriou (2010) and Alzoubi (2014) report a negative association between the fraction of outside directors and the informativeness of annual accounting earnings. On the other hand, Park and Shin (2004) and Bradbury et al. (2006) do not nd a signicant correlation between board independence and nancial reporting quality. Board duality (BD it ) is represented as a dummy variable, taking the value of one (1) when the chair of the board also serves as the CEO of the rm, and zero (0) otherwise. Saleh et al. (2005) argue that separating the roles of chair and CEO enhances board oversight, positively impacting nancial re- porting quality. Similarly, Nugroho (2012), Alzoubi (2014), and Taktak and Mbarki (2014) predict a pos- itive association between board duality and nancial reporting quality. In contrast, Klein (2002) suggests a signicant negative relationship between board dual- ity and nancial reporting quality, while Rahman and Ali (2006) and Abed et al. (2012) nd no signicant relationship. Firm growth (FG it ) is measured as the market value of equity divided by the book value of equity. While Doyle et al. (2007), Ashbaugh-Skaife et al. (2007), and Hassan et al. (2022) nd that young, growing rms tend to disclose more internal control weaknesses, Tang et al. (2016) and Soyemi and Olawale (2019) report a negative association between rm growth and nancial reporting quality. In contrast, Seiyaibo and Okoye (2020) reveal no signicant relationship between rm growth and nancial reporting quality. Asset tangibility (AT it ) is assessed as the proportion of tangible assets to total assets in the rm’s asset structure. Soyemi and Olawale (2019) and Bao et al. (2021) discover that asset tangibility exerts a negative, signicant inuence on nancial reporting quality, suggesting that an excessive focus on tangible assets such as plant, property, and equipment (PPE) can lower the quality of disclosure. In contrast, Gerayli et al. (2021) do not nd any signicant association be- tween asset tangibility and nancial reporting quality. Proxy measures for the dependent, independent, and control variables are dened in Table 1. 3.5 Model specication—econometric issues In this study, we employ a dynamic panel-data model and utilize the Arellano–Bover/Blundell– Bond system estimator, a two-step generalized method of moments estimator that leverages instru- mental variables to mitigate the issue of endogeneity. Endogeneity, characterized by a correlation between explanatory variables and the error term in a regression model, can introduce bias to parameter estimates of interest. This correlation may stem from omitted variables, simultaneity, measurement error, or other factors. When endogeneity is present, the ordinary least squares (OLS) estimator loses consistency and becomes biased. The general model used is the following: Y it Da it C0Y it 1 CbX it C u it (3) where Y it is the dependent variable for rm i in year t; a it is rm-specic effects; X it is the vector of independent variables that contains exogenous and endogenous variables; u it is the error term, and0 and b the parameters to be estimated. With this specication the outline of the Bover/Blundell–Bond system estimator is as follows: We assume that there is no autocorrelation in the error term u it , hence, 1u it is correlated with ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 11 Table 1. Variable denitions. Variable Denition Dependent variable FRQ it Financial reporting quality proxied by StarMine’s earnings quality. Data source: StarMine database Independent variables KEPU It Korean economic policy uncertainty. Data source: Cho and Kim (2023) FSentiment it Firm-level investor sentiment as measured by Liao et al. (2011) MSentiment It Market-level investor sentiment as measured by Anusakumar et al. (2017) PrFSR it Probability of a nancial statement restatement measured as a dummy variable that takes the value of one (1) if the rm restated and zero (0) otherwise. Data source: Eikon Datastream PrGCO it Probability of a going-concern opinion measured as a dummy variable that takes the value of one (1) if the rm received a going-concern modied audit opinion and zero (0) otherwise. Data source: Eikon Datastream Control variables AT it Asset tangibility measured as the proportion of tangible asset to total asset in the rm asset structure. Data source: Eikon Datastream BD it Board duality measured as a dummy variable that takes the value of one (1) when the chair of the board is also the CEO of the rm and zero (0) otherwise. Data source: Eikon Datastream BI it Board independence measured as the proportion of independent nonexecutive directors on the board. Data source: Eikon Datastream BS it Board size measured by the natural log of number of directors on the board. Data source: Eikon Datastream FG it Firm growth measured as market value of equity divided by book value of equity. Data source: Eikon Datastream FLEV it Firm leverage proxied by debt-to-equity ratio measured as total liabilities divided by total shareholders’ equity. Data source: Eikon Datastream FLIQ it Firm liquidity proxied by current ratio measured as current assets divided by current liabilities. Data source: Eikon Datastream FP it Firm protability proxied by return on equity measured as net income divided by the book value of equity. Data source: Eikon Datastream 1u it 1 but uncorrelated with1u it k for k > 2. This assumption can be tested by the Arellano–Bond test (see, e.g., Arellano & Bond, 1991). In model (3) the dependent variable with one lag is also a regressor. In this case xed effects need to be eliminated by rst differencing instead of xed effects transformation (mean differencing), so, under the above assumption, lags Y it 2 , Y it 3 ::: can be used as instruments in the rst-differenced model. To improve the precision of the estimates, Arellano and Bover (1995) and Blundell and Bond (1998) imposed the additional condition E(1Y it 1 u it )D 0, so as to incorporate, along with the rst-differenced equation, the level equation model instrumented by 1Y it 1 . The model includes, as regressors, variables that are supposed to be exogenous as well as endogenous. Therefore, similar model conditions can be added for these variables so that rst differences can be used as instruments. Since a generalized method of moments estimator is used, the validity of model instruments can be evaluated performing Sargan’s test of overidentifying instruments (Cameron & Trivedi, 2010). Using model (3) and adopting the underlying as- sumptions, the following econometric framework is proposed to test the hypotheses developed in previ- ous sections. First, to test H1, we run the following equation in order to investigate the effect of Korean economic policy uncertainty (KEPU It ) on nancial reporting quality proxied by StarMine’s earnings quality (FRQ it ). FRQ it Da i Ca 1 FRQ it Ca 2 KEPU It Ca 3 FSentiment it Ca 5 MSentiment It Ca 11 FLEV it Ca 12 FLIQ it Ca 13 FP it Ca 14 BS it Ca 15 FG it Ca 16 AT it Ca 17 BD it Ca 18 BI it C u it (4) After this relationship is explored, to test H2 and H3, we run models (5) and (6) to explore the impact of investor sentiment, measured by rm- (FSentiment it ) and country-level investor sentiment (MSentiment It ; model [5]), FRQ it Da i Ca 1 FRQ it Ca 2 KEPU It Ca 3 FSentiment it Ca 4 KEPU It FSentiment it Ca 5 MSentiment It Ca 6 KEPU It MSentiment It Ca 11 FLEV it Ca 12 FLIQ it Ca 13 FP it Ca 14 BS it Ca 15 FG it Ca 16 AT it Ca 17 BD it Ca 18 BI it C u it (5) and audit quality, measured by the probability of a nancial statement restatement (PrFSR it ) and the probability of a going-concern opinion (PrGCO it ), 12 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 as factors that potentially offset the impact of eco- nomic policy uncertainty on nancial reporting qual- ity (model [6]). FRQ it Da i Ca 1 FRQ it Ca 2 KEPU It Ca 7 PrFSR it Ca 8 KEPU It PrFSR it Ca 9 PrGCO it Ca 10 KEPU It PrGCO it Ca 11 FLEV it Ca 12 FLIQ it Ca 13 FP it Ca 14 BS it Ca 15 FG it Ca 16 AT it Ca 17 BD it Ca 18 BI it C u it (6) In models (4), (5), and (6), we treat the variables BD it , BI it , and BS it as exogenous. To test the assump- tion of no serial correlation of the error term, as we have already noted, the Arellano–Bond test for se- rial correlation in the rst-differenced residuals is performed while the Sargan test of overidentifying restrictions is used (Arellano & Bond, 1991). 4 Empirical results 4.1 Descriptive statistics Table 2 presents descriptive statistics for the depen- dent, independent, control, and additional variables, including mean, standard deviation, minimum, and maximum values. On average, the rms in our sample display relatively low earnings quality, with a median FRQ it of 11.235, which aligns with the ndings made by An (2015). Further, consistent with Hyo-Jeong’s (2023) ndings, Korean rms, on average, exhibit high levels of rm- and market-level sentiment throughout the study period. Contrary to the conclusions of Heo et al. (2021), approximately 65% of the sample rms experienced restatements. Additionally, 3% of the rms received modied audit opinions with a going-concern emphasis, in line with Kim et al. (2015). The descriptive statistics for the KEPU It variable indicate that most sample rms encountered high economic policy uncertainty. Regarding the descriptive statistics of control vari- ables, Table 2 indicates that the AT it values range from 0.000 to 9.607, indicating a diverse asset struc- ture among Korean rms. The variable for BD it shows that 25% of rms had the same individual serving as both CEO and chair of the board, potentially compro- mising the independence of board oversight. BI it is relatively high, with a mean value of 55.441, suggest- ing a signicant presence of nonexecutive directors. FG it and FP it also show considerable variation, with mean values of 3.831 and 10.045, respectively. FLEV it and FLIQ it of rms, indicated by a mean debt-to- equity ratio of 1.111 and a current ratio of 2.890, provide insights into their nancial health and oper- ational stability. Table 2. Descriptive statistics. Obs Mean SD Min Max AT it 18,651 0.039 0.060 0.000 9.607 BD it 18,651 0.250 0.433 0.000 1.000 BI it 18,651 55.441 14.064 0.000 100.000 BS it 18,651 9.102 3.586 1.000 41.000 FG it 18,651 3.831 0.679 0.089 8.387 FLEV it 18,651 1.111 20.423 0.000 1,981.409 FLIQ it 18,651 2.890 7.911 0.037 553.666 FP it 18,651 10.045 0.826 5.882 13.647 FRQ it 18,651 11.495 0.821 7.176 14.594 FSentiment it 18,651 11.089 0.699 6.505 14.472 KEPU It 18,651 102.301 14.911 79.217 133.606 KERPU It 18,651 83.415 35.631 40.823 250.910 KFPU It 18,651 109.975 21.569 62.527 140.123 KGPU It 18,651 122.519 47.977 52.667 238.917 KMPU It 18,651 108.163 20.432 80.990 163.020 KPU It 18,651 0.375 0.484 0.000 1.000 KTPU It 18,651 97.208 58.023 41.868 252.192 MSentiment It 18,651 11.026 0.085 10.485 11.397 PrFSR it 18,651 0.657 0.475 0.000 1.000 PrGCO it 18,651 0.003 0.058 0.000 1.000 Note. The sample covers the period 1998–2021. The variables are dened in Table 1. 4.2 Bivariate analysis Table 3 presents both the Pearson (vertical columns) and Spearman (horizontal rows) correlation matri- ces for the variables, thereby revealing the linear and monotonic interrelationships and associations with the dependent variable. Notably, the univariate statistics indicate that KEPU It is positively corre- lated with FRQ it , implying that heightened economic policy uncertainty corresponds to higher nancial reporting quality. This suggests that rms, during un- certain times, opt for greater caution and adopt more conservative accounting practices, providing a more accurate portrayal of their nancial position. FSentiment it and MSentiment It display a signicant negative correlation with FRQ it . This implies that negative investor sentiment incentivizes rms to enhance the comprehensiveness and transparency of their nancial disclosures, aiming to rebuild investor condence and attract new investments. The correlation analysis reveals that PrFSR it is sig- nicantly and negatively correlated with FRQ it at a 1% signicance level. This nding hints at a po- tential positive impact of audit quality on nancial reporting quality, indicating that by reducing restate- ments, rms exhibit a commitment to transparency, diminishing perceptions of nancial irregularities and bolstering trust among stakeholders. Similarly, PrGCO it , our second proxy of audit qual- ity, exhibits a negative correlation with FRQ it at a 1% signicance level. This suggests that a lower proba- bility of receiving a going-concern opinion indicates that a rm’s nancial statements are more likely to ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 13 Table 3. Pearson and Spearman correlation matrix. FRQ it KEPU It FSentiment it MSentiment It PrFSR it PrGCO it FLEV it FLIQ it FP it BS it FG it AT it BD it BI it FRQ it 1 .0250 .9485 .1643 .0498 .0070 .0369 .2319 .8076 .0173 .6525 .2431 .027 .0002 KEPU It .0720 1 .0199 .0193 .0029 .0021 .0026 .0253 .0141 .0300 .0070 .0271 .016 .0118 FSentiment it .9332 .0077 1 .2021 .0767 .0108 .0205 .1009 .8376 .0104 .6899 .2580 .036 .0094 MSentiment It .1673 .1347 .2116 1 .1321 .0038 .0065 .0148 .1184 .0159 .0966 .1069 .169 .0092 PrFSR it .2403 .0071 .3021 .1181 1 .0055 .0186 .0106 .0502 .0166 .1352 .224 .09 .0201 PrGCO it .0043 .0020 .0101 .0006 .0055 1 .0006 .0042 .0057 .0018 .0109 .0080 .0016 .0104 FLEV it .3130 .0030 .0523 .0118 .0766 .0055 1 .0130 .0089 .0117 .0211 .0767 .04 .0226 FLIQ it .3484 .0018 .1091 .0238 .0389 .0021 .7635 1 .0802 .0163 .0080 .0658 .029 .0203 FP it .7653 .0045 .8010 .1137 .1597 .0060 .0326 .0900 1 .0255 .6151 .1544 .0071 .0068 BS it .0136 .0114 .0063 .0071 .0120 .0063 .0127 .0091 .0082 1 .0046 .0070 .0160 .0138 FG it .6713 .0217 .7343 .1115 .1879 .0140 .0334 .0389 .6110 .0186 1 .1271 .0064 .0182 AT it .1609 .0051 .1664 .1339 .1107 .0123 .0023 .0538 .2209 .0208 .1205 1 .13 .0165 BD it .0001 .0316 .0018 .1249 .0919 .0016 .0076 .0104 .0632 .0066 .0466 .6171 1 .0081 BI it .0085 .0051 .0162 .0057 .0185 .0095 .0017 .0280 .0171 .0061 .0045 .0121 .0141 1 Note. The variables are dened in Table 1. , , * Signicant at p < .01, p < .05, and p < .10, respectively. Number of observations: 18,651. reect stability and sustainability, potentially lead- ing to increased transparency in nancial reporting and higher-quality information for nancial state- ment users. 4.3 Multivariate analysis Table 4 displays the results of multiple regression analysis for three specications of Eq. (4), denoted as Models 1, 2, and 3. Model 1 examines the inuence of Korean economic policy uncertainty (KEPU It ) on nancial reporting quality (FRQ it ). Models 2 and 3 investigate the potential mitigating effects of investor sentiment, measured by rm-level (FSentiment it ) and market-level (MSentiment It ) sentiment, as well as au- dit quality, quantied by the probability of a nancial statement restatement (PrFSR it ) and the probability of a going concern opinion (PrGCO it ), on the relation- ship between Korean economic policy uncertainty (KEPU It ) and nancial reporting quality (FQR it ). Table 4 reveals a positive association between Ko- rean economic policy uncertainty (KEPU It ) and - nancial reporting quality (FRQ it ). This relationship remains consistently signicant across all models (.002, pD .029 in Model 1; .038, pD .000 in Model 2; .000, pD .033 in Model 3), thus conrming H1. When economic policy uncertainty rises, managers are in- centivized to reduce earnings management, aiming to mitigate the adverse effects of heightened un- certainty. These ndings align with prior research conducted by Bu et al. (2020), Kim and Yasuda (2021), El Ghoul et al. (2021), Chui and Wei (2021), and Bermpei et al. (2022), while diverging from the re- sults of Yung and Root (2019), Ng et al. (2020), and Dai and Ngo (2021). Specically, our results suggest that increased economic policy uncertainty may drive rms to enhance their disclosure practices, provid- ing more transparency and information to investors and stakeholders, ultimately leading to improved - nancial reporting quality. This positive relationship between economic policy uncertainty and nancial reporting quality can be further interpreted within the agency theory framework. According to agency theory, managers act as agents for shareholders (prin- cipals) and are expected to act in the best interests of the principals. However, during periods of high economic policy uncertainty, the risk of opportunistic behavior by managers increases, as they may attempt to manipulate nancial reports to protect their own interests. This potential for opportunism heightens the demand for higher nancial reporting quality to mitigate information asymmetry and ensure that managers’ actions align with shareholders’ interests. Consequently, rms are more likely to enhance their nancial reporting quality in response to rising eco- nomic policy uncertainty, as a mechanism to maintain investor trust and avoid potential agency costs. Table 4 also reveals notable insights in Model 2, where we observe a signicant relationship between investor sentiment, both at the rm level (FSentiment it ; .362, p D .000) and market level (MSentiment It ; .303, p D .000), and nancial reporting quality (FRQ it ), thus conrming H2. This suggests that managers are motivated to enhance the quality of nancial reporting during periods of pessimistic investor sentiment, aiming to counteract this negative sentiment. In more detail, negative investor sentiment can act as a catalyst for rms to provide more comprehensive and transparent nancial disclosures, with the goal of rebuilding investor condence, fostering trust, and attracting new investments. By presenting a clearer and more informative view of their nancial health and future prospects, rms aim to mitigate the adverse effects of pessimistic sentiment. In the agency theory framework, the relationship between investor sentiment and nancial reporting quality highlights the role of managerial incentives in reducing information asymmetry. Specically, during periods of pessimistic investor sentiment, managers are more 14 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 Table 4. Empirical results for Eqs. (4) to (6). Model 1 Model 2 Model 3 FRQ it Coef. Coef. Coef. FRQ t 1 0.770 0.564 0.742 KEPU It 0.002 0.038 0.000 FSentiment it 0.362 KEPU It FSentiment it 0.004 MSentiment It 0.303 KEPU It MSentiment It 0.004 PrFSR it 0.007 PrGCO it 0.106 KEPU It PrFSR it 0.002 KEPU It PrGCO it 0.034 BD it 0.014 0.011 0.011 AT it 0.401 0.294 0.175 BI it 0.000 0.000 0.000 BS it 0.001 0.000 0.002 FG it 0.244 0.036 0.278 FLEV it 0.001 0.001 0.001 FLIQ it 0.002 0.003 0.003 FP it 0.039 0.030 0.038 constant 1.279 2.834 1.472 Obs 18,651 18,651 18,651 Arellano/Bond test order 1 zD 16.376, prob > zD .000 zD 16.410, prob > zD .000 zD 16.423, prob > zD .000 Arellano/Bond test order 2 zD 1.274, prob > zD .144 zD 1.470, prob > zD .142 zD 1.461, prob > zD .144 Sargan test $ 2 D 1013.828, prob >$ 2 D .777 $ 2 D 1022.207, prob >$ 2 D .718 $ 2 D 1023.578, prob >$ 2 D .707 Note. Arellano–Bond tests for zero autocorrelation in rst-differenced errors are presented for the three models. The null hypothesis at order 2 is not rejected, which implies that the moment conditions are valid. The results of the Sargan test suggest that overidentifying restrictions are valid for all three models. The variables are dened in Table 1. , , Signicant at p < .01, p < .05, and p < .10, respectively. likely to enhance nancial reporting quality to align with shareholders’ interests, thereby mitigating the potential agency costs associated with negative mar- ket perceptions. This proactive approach by managers serves to restore investor condence and aligns their actions with the long-term value creation expected by shareholders, consistent with agency theory’s emphasis on reducing principal–agent conicts. Furthermore, Model 2 introduces interaction terms, KEPU It FSentiment it ( .004, p D .000) and KEPU It MSentiment It ( .004, pD .000), which exhibit a negative and signicant association with nancial reporting quality (FRQ it ). This nding supports H2 and indicates that Korean economic policy uncertainty plays a vital role in moderating rm- and market-level investor sentiment concerning nancial reporting quality. It underscores the inuence of economic policy uctuations and uncertainties in South Korea on investor perceptions of rms and the way these rms report their nancial information. Ultimately, this highlights the importance of stable and predictable economic policies in promoting investor condence and maintaining high-quality nancial reporting practices in the South Korean context. These results can be explained with the principles of agency theory. In this regard, it can be observed that the interaction between economic policy uncertainty and investor sentiment directly inuences the nancial reporting quality, as these factors heighten the agency conicts between managers and shareholders. Specically, during periods of increased economic policy uncertainty, the pressure on managers to maintain investor condence through high nancial reporting quality is intensied, aligning with the agency theory framework, according to which management’s actions are scrutinized more closely by investors, thereby reducing information asymmetry and enhancing reporting transparency. In Table 4, Model 3 demonstrates a signicant neg- ative association between audit quality and nancial reporting quality. Specically, the probabilities of nancial statement restatement (PrFSR it ; .007, pD .000) and going-concern opinions (PrGCO it ; .002, pD .000) exert a detrimental impact on nancial reporting quality (FRQ it ). This nding aligns with Kamolsakulchai’s (2015) results, indicating that rms enhance audit quality to improve nancial reporting ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 15 quality, thus supporting H3. A reduced likelihood of nancial statement restatement enhances nancial reporting quality by enhancing data comparability, facilitating informed decision making for stake- holders. Similarly, a diminished probability of a going-concern opinion enhances nancial reporting quality by augmenting transparency, reliability, deci- sion making, risk perception, and market perception. This negative association between audit quality and nancial reporting quality can be explained in the framework of agency theory, which posits that higher audit quality acts as a mechanism to reduce information asymmetry between management and stakeholders. Therefore, rms are incentivized to enhance audit quality, thereby aligning managerial actions with shareholder interests, ultimately leading to an increase in nancial reporting quality. Additionally, the interaction terms KEPU It PrFSR it ( .106, pD .000) and KEPU It PrGCO it ( .034, pD .000; see Model 3) exhibit a signicant negative rela- tionship with nancial reporting quality, reinforcing H3. These results afrm that audit quality exerts a more pronounced inuence on nancial reporting quality during periods of economic uncertainty. High audit quality ensures that nancial statements ac- curately reect the economic ramications of policy uncertainty, facilitating well-informed decisions for investors, regulators, and other stakeholders. Our re- sults align with the principles of agency theory, which posits that in times of heightened uncertainty, the role of audit quality becomes increasingly critical in align- ing the interests of managers and shareholders. As economic policy uncertainty increases, the rigorous scrutiny provided by high audit quality mitigates in- formation asymmetry, thereby reducing agency costs and enhancing the credibility of nancial reporting. Consistent with prior studies (e.g., Ashbaugh- Skaife et al., 2007; Bimo et al., 2019; Echobu et al., 2017; Hassan et al., 2022; Kwanbo, 2020; Mahbound, 2017; Soyemi & Olawale, 2019; Waweru & Riro, 2013), board independence (BI it ), board size (BS it ), rm growth (FG it ), rm leverage (FLEV it ), and rm protabil- ity (FP it ) all positively inuence nancial reporting quality (FRQ it ). Larger boards, in accordance with Echobu et al. (2017) and Hassan et al. (2022), en- hance nancial reporting quality by offering a wider array of expertise and perspectives, augmenting over- sight and accountability. Independent directors, as highlighted by Waweru and Riro (2013), ensure com- pliance with accounting standards and regulatory requirements by overseeing management’s nancial reporting activities. Furthermore, in alignment with Ashbaugh-Skaife et al. (2007) and Hassan et al. (2022), rm growth fos- ters incentives for improved nancial reporting due to increased resources, enabling investments in en- hanced reporting systems, skilled accountants, and robust internal controls, thereby contributing to more accurate and reliable nancial reporting. High rm leverage, as noted by Mahbound (2017), Echobu et al. (2017), and Bimo et al. (2019), motivates rms to enhance reporting practices to preserve credibility and withstand external scrutiny, ultimately elevat- ing nancial reporting quality. Lastly, our ndings echo the conclusions of Soyemi and Olawale (2019) and Kwanbo (2020), suggesting that bolstering rm protability positively impacts nancial reporting quality by providing additional resources for report- ing, fostering incentives for accuracy, and promoting enhanced disclosure practices. Conversely, an increase in board duality (BD it ), asset tangibility (AT it ), and rm liquidity (FLIQ it ) is associated with reduced nancial reporting qual- ity (FRQ it ; Bao et al., 2021; Hassan et al., 2022; Klein, 2002; Shehata et al., 2014; Shehu & Ahmad, 2013; Soyemi & Olawale, 2019). Board duality dimin- ishes board independence and objectivity, potentially compromising the integrity and quality of nancial information (Klein, 2002). Moreover, as observed in Soyemi and Olawale (2019) and Bao et al. (2021), rms with a higher concentration of tangible as- sets tend to exhibit lower nancial reporting quality compared to those with more intangible assets. This discrepancy arises from the subjectivity involved in measuring and valuing intangible assets, which introduces uncertainty and reduces reporting qual- ity. Similarly, in accordance with Shehu and Ah- mad (2013), Shehata et al. (2014), and Hassan et al. (2022), rms with low liquidity may resort to nancial statement manipulation to portray a rosier nancial performance. Such manipulation can involve aggressive revenue recognition, overstate- ment of assets, or understatement of liabilities, ul- timately leading to diminished nancial reporting quality. 5 Additional analysis 5.1 Sensitivity test using alternative measure of nancial reporting quality As a sensitivity test, we employ earnings management as an alternative measure of nancial reporting quality. Accrual accounting offers managers the exibility to manipulate prots (Lin & Yen, 2022). Prior research extensively investigates discretionary accruals during uncertain periods (Bermpei et al., 2022; Ghosh & Olsen, 2009; Kim & Yasuda, 2021; Yung & Root, 2019). In line with these studies, we gauge nancial reporting quality using discretionary 16 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 Table 5. Additional analysis using alternative measure of nancial reporting quality. Model 1 Model 2 Model 3 DA it Coef. Coef. Coef. DA it 1 0.057 0.044 0.063 KEPU It 0.054 5.023 0.114 FSentiment it 25.819 KEPU It FSentiment it 0.086 MSentiment It 37.906 KEPU It MSentiment It 0.364 PrFSR it 9.581 PrGCO it 23.459 KEPU It PrFSR it 0.097 KEPU It PrGCO it 2.262 BD it 0.554 0.836 2.500 AT it 26.581 10.756 11.201 BI it 0.031 0.044 0.008 BS it 0.695 0.581 0.622 FG it 9.087 4.875 8.454 FLEV it 0.038 0.009 0.029 FLIQ it 0.066 0.057 0.067 FP it 12.403 14.128 12.745 constant 32.306 602.352 35.791 Obs 18,651 18,651 18,651 Arellano/Bond test order 1 zD 6.329, prob > zD .000 zD 6.583, prob > zD .000 zD 6.423, prob > zD .000 Arellano/Bond test order 2 zD 1.114, prob > zD .265 zD 0.961, prob > zD .597 zD 0.889, prob > zD .375 Sargan test $ 2 D 1016.758, prob >$ 2 D .691 $ 2 D 1028.160, prob >$ 2 D .597 $ 2 D 1012.73, prob >$ 2 D .707 Note. Arellano–Bond tests for zero autocorrelation in rst-differenced errors are presented for the three models. The null hypothesis at order 2 is not rejected, which implies that the moment conditions are valid. The results of the Sargan test suggest that overidentifying restrictions are valid for all three models. The variables are dened in Table 1. , , Signicant at p < .01, p < .05, and p < .10, respectively. accruals, following the approach outlined by Dechow et al. (1995) and Kothari et al. (2005). Dechow et al. (1995) assert that a modied ver- sion of the Jones (1991) model surpasses other models in detecting earnings management. Conse- quently, adhering to Dechow et al. (1995) and Kothari et al. (2005), we compute discretionary accruals by estimating the following model: TA it Da 0 Ca 1 (1=Assets t 1 )Ca 2 (1Sales it 1AR it ) Ca 3 PPE it Ca 4 ROA t 1 C+ (7) where TA it is total accruals measured by deducting operating cash ows from net income; Assets t 1 is total assets at beginning year; 1Sales it is change in sales;1AR it is change in accounts receivables; PPE it is total property, plant, and equipment scaled by be- ginning total assets; ROA t 1 is the rate of return on assets at beginning year. Discretionary accruals (DA it ) are calculated as the residuals of the above equa- tion. A higher DA it indicates higher levels of earnings management. Table 5 presents the additional test results, which align qualitatively with the main ndings reported in Table 4. Notably, in all models, the coefcients on Korean economic policy uncertainty remain positive and signicant. Furthermore, mirroring the outcomes in Table 4, the coefcients on investor sentiment at both the rm and market levels exhibit negative and signicant associations. Likewise, there exists a positive and signicant correlation between nancial reporting quality and audit quality. These consistent results indicate the robustness of the main ndings, even when employing earnings management as an alternative measure of nancial reporting quality. 5.2 Sensitivity test using alternative measures of policy uncertainty As a sensitivity test, we employ alternative un- certainty indices calculated by Cho and Kim (2023) for scal, exchange rate, trade, and monetary uncer- tainties. Additionally, we utilize the geopolitical risk index developed by Seungho et al. (2021) as another alternative measure of policy uncertainty. Seungho et al. (2021) note that this index reects uctua- tions in geopolitical risk, spiking during events such as nuclear tests, missile launches, or military con- frontations, and decreasing notably during summit meetings or multilateral talks. Fig. 2 illustrates the trends for all these indices. Fig. 2 illustrates that the subtypes of Korean uncer- tainty indices, as calculated by Cho and Kim (2023) and Seungho et al. (2021), exhibit a consistent trend with the Korean economic policy uncertainty index. However, aside from the periods of high economic ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 17 Fig. 2. Policy uncertainty indices of South Korea calculated by Cho and Kim (2023) and Seungho et al. (2021). policy uncertainty, various events and policies have also inuenced Korean scal, exchange rate, trade, and monetary uncertainties. These events include the ofcial launch of the World Trade Organization in 1995, the Bank of Japan’s FX intervention to stabilize the Korean won in 2001, and numerous other global economic and political occurrences such as the dot- com bubble in 2002, the election of President George W. Bush in 2004, and the U.S.–China trade war in 2018, among others. A more comprehensive comparison is available in Cho and Kim (2023). Moreover, Korean geopolitical risk experiences sig- nicant spikes during events such as North Korea’s nuclear tests, missile launches, or military confronta- tions. Instances include North Korea’s withdrawal from the International Atomic Energy Agency agree- ment in 2003, the launch of Daepodong and the rst North Korean nuclear test in 2006, and other con- frontations such as the bombardment of Yeonpyeong Island in 2010. Conversely, the risk decreases notably during bilateral or multilateral meetings, such as the agreement for a summit between North and South Korea in 2000 and the U.S.–North Korea summit in Singapore in 2018 (Seungho et al., 2021). Given this context, we conduct tests using alter- native lag versions of policy uncertainty variables, including Korean scal policy uncertainty (KFPU It ), Korean exchange rate policy uncertainty (KERPU It ), Korean trade policy uncertainty (KTPU It ), and Korean monetary policy uncertainty (KMPU It ), as devised by Cho and Kim (2023). Additionally, we incorporate the Korean geopolitical risk index (KGPU It ) by Seungho et al. (2021) for our research purposes. Instead of using the subtypes of uncertainty indices calculated by Cho and Kim (2023) for scal, exchange rate, trade, and monetary uncertainties as alternatives to economic policy uncertainty, we further examine Korean political uncertainty as an alternative. Baker et al. (2020) suggest that political division, polariza- tion, and the increased role of government spending in the overall economy are major factors leading to a spike in uncertainty. Julio and Yook (2012) highlight the elevated uncertainties observed during election periods compared to nonelection years. Additionally, Pástor and Veronesi (2013) assert that political tran- sition periods lead to delays in economic production and policy analysis across various sectors, exert- ing a long-term inuence on a country’s economic landscape. To measure political uncertainty, we draw from the works of Mei and Guo (2004) and Julio and Yook (2012), who highlight the multifaceted nature of political uncertainty, encompassing events such as revolutions, changes in elected government, and shifts in domestic and foreign policy. However, they recommend focusing on election years as a primary proxy for political uncertainty and propose employ- ing a dummy variable for these periods. Thus, for our research, we adopt the political uncertainty measure (KPU It ) developed by Mei and Guo (2004). To construct the political uncertainty dummy, we consider the timing of political elections and transi- tions based on presidential elections. If an election occurs in the rst half of year t, we set the political dummy to 1 for both year t and t 1. Conversely, if the election falls in the second half of year t, we designate the political dummy as 1 for both year t and t + 1. It is important to note that, consistent with Mei and Guo (2004), our analysis exclusively encompasses sched- uled elections determined by the Korean constitution 18 ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 Table 6. Additional analysis using alternative measures of policy uncertainty. Model KMPU It KFPU It KTPU It KERPU It KGPU It KPU It FRQ it Coef. Coef. Coef. Coef. Coef. Coef. FRQ t 1 0.758 0.758 0.758 0.757 0.758 0.758 BD it 0.006 0.006 0.006 0.005 0.006 0.006* BS it 0.000 0.000 0.000 0.000 0.000 0.000 FG it 0.001 0.001 0.002 0.002 0.001 0.001 FLEV it 0.000 0.000 0.000 0.000 0.000 0.000 FLIQ it 0.003 0.004 0.003 0.003 0.004 0.004 FP it 0.028 0.028 0.028 0.028 0.028 0.028 FSentiment it 0.206 0.218 0.226 0.231 0.230 0.227 MSentiment It 0.199 0.254 0.224 0.070 0.150 0.063 KMPU It 0.024 KFPU It 0.032 KTPU It 0.041 KERPU It 0.009 KGPU It 0.009 KPU It 0.605* constant 2.019 2.749 2.486 0.847 1.607 0.680 Obs 18,651 18,651 18,651 18,651 18,651 18,651 Note. Arellano–Bond tests for zero autocorrelation in rst-differenced errors are presented for the three models. The null hypothesis at order 2 is not rejected, which implies that the moment conditions are valid. The results of the Sargan test suggest that overidentifying restrictions are valid for all models. The variables are dened in Table 1. , , Signicant at p < .01, p < .05, and p < .10, respectively. and excludes unscheduled elections. In South Korea, elections on a national level determine the president and the national assembly. Presidents are directly elected for a single ve-year term through a plurality vote. Notably, our research period spans from 1998 to 2021, during which the presidents elected via popular vote were as follows: Kim Young-sam (14th presi- dent, December 1992), Kim Dae-jung (15th president, December 1997), Roh Moo-hyun (16th president, December 2002), Lee Myung-bak (17th president, December 2007), Park Geun-hye (18th president, De- cember 2012), and Moon Jae-in (19th president, May 2017). Table 6 presents the additional test results, reaf- rming that all alternative policy uncertainty indices exert a positive and signicant inuence on nan- cial reporting quality. These ndings align with expectations and mirror the primary results reported in Table 4. 6 Conclusions This study empirically investigates the impact of economic policy uncertainty on nancial reporting quality within South Korea’s publicly listed rms. Analyzing data from 1998 to 2021, our ndings reveal that managers are inclined to enhance the quality of nancial information, particularly during recessions or periods of heightened economic uncertainty, to address the concerns of investors, analysts, and credi- tors. Furthermore, we observe that nancial reporting quality tends to be elevated during phases of low investor sentiment, with a more pronounced effect in rms facing higher uncertainty. This underscores managers’ motivation to bolster nancial report- ing quality during periods of pessimistic investor sentiment. Interestingly, we identify a negative association between investor sentiment and nancial reporting quality, which is amplied during periods of ele- vated economic policy uncertainty. Our research also highlights the role of management incentives in shap- ing audit quality. Specically, we demonstrate that rms enhance the comparability of their nancial information by minimizing restatements, enabling stakeholders to make more informed decisions based on reliable and consistent data. Additionally, our study underscores the signi- cance of reducing the likelihood of a going-concern opinion in enhancing nancial reporting quality. This improvement is manifested through increased transparency, reliability, informed decision making, improved risk perception, and enhanced market per- ception. Such enhancements foster condence and trust in a company’s nancial statements, beneting both the organization and its stakeholders. Notably, the positive inuence of audit quality on nancial ECONOMIC AND BUSINESS REVIEW 2025;27:1–24 19 reporting quality is more pronounced during periods of economic uncertainty. Our results remain robust when subjected to vari- ous tests, including alternative measures of nancial reporting quality and policy uncertainty. Notably, the impact of economic policy uncertainty on nan- cial reporting quality exhibits variations based on subcategories of policy uncertainty and individual rms’ exposures to these categories. These ndings are further substantiated through the application of additional measures of nancial reporting quality. Our study has practical implications for various stakeholders, including investors, analysts, regula- tors, and creditors, by elucidating the relationship between economic policy uncertainty and nancial reporting quality. The moderating roles of audit quality and investor sentiment are crucial in this re- lationship. During periods of high economic policy uncertainty, managers may seek to reduce earnings management to bolster investor condence. This un- derscores the importance of high nancial reporting quality, which equips investors and analysts with the necessary tools to conduct precise risk assessments and adjust investment strategies accordingly. Further- more, companies facing economic policy uncertainty must make strategic decisions related to capital al- location, cost management, and investments, where reliable nancial reporting plays a vital role in en- abling informed nancial choices and mitigating potential risks. Transparent and high nancial reporting quality is essential for fostering trust among stakeholders, including shareholders, lenders, suppliers, and cus- tomers. This trust, coupled with a positive reputation, becomes particularly valuable during periods of high economic policy uncertainty. Firms that consistently provide reliable nancial information are better posi- tioned to maintain stakeholder condence and secure ongoing support. Our ndings highlight the rela- tionship between uncertainty and nancial reporting quality, emphasizing that this link can be inuenced by a country’s institutional framework and infor- mation environment. Our ndings are particularly relevant for regulatory bodies and nancial market participants, offering guidance on navigating periods of economic policy uncertainty. Our research further explores how economic pol- icy uncertainty shapes managerial accounting policy decisions, particularly in emerging markets such as South Korea. These markets may present unique in- centives for managers to navigate country-specic economic policy uctuations. Additionally, we in- vestigate the moderating roles of investor senti- ment and audit quality in the relationship between economic uncertainty and nancial reporting quality. The ndings suggest the necessity of heightened vig- ilance regarding nancial reporting during uncertain times, as rms may be tempted to overstate their per- formance. Our study’s implications extend beyond South Korea and are relevant to all Asian economies, given the signicant comovement in business cycles documented by Kim et al. (2003). These insights are applicable to other Asian societies with shared gov- ernance structures and societal values, as highlighted by Porta et al. (1998) and Chia et al. (2007). Our study has a limitation concerning its focus on the Korean context, particularly in the examination of business conglomerates known as chaebols. These chaebols feature a distinctive organizational structure marked by a central parent company wielding control and supervision over a diverse array of subsidiary rms, often inuenced signicantly by a single fam- ily (Vo et al., 2022). Chaebols stand out due to their concentrated ownership, control, and manage- ment, typically rooted in a single family dynasty, frequently tracing its lineage back to the group’s founder. Consequently, there is an intriguing and rel- evant opportunity for future research to explore the quality of nancial reporting in the context of uncer- tainty within chaebol corporations. Furthermore, understanding would be enriched by investigating potential mediating factors such as investor sentiment and audit quality in the relation- ship between economic policy uncertainty and nan- cial reporting quality. Lastly, an additional avenue for future exploration lies in examining the nan- cial reporting quality within Japan’s keiretsu busi- ness groups, which share similarities with chaebols. Keiretsu enterprises often operate under professional executive management, diverging from the predom- inantly family-governed chaebol model. 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