ABSTRACT This study empirically analyzes the effects of the voluntary adoption and quality of integrated reports (IRs) on the cost of equity capital in Japan. Using 514 Tokyo Stock Exchange listed firms (over 2004–2020) and employing propensity score matching, difference‐in‐differences, and fixed effects models, we find that the adoption of IRs significantly reduces the cost of equity capital. This effect is stronger for high‐quality IRs, particularly in environmentally intensive industries and firms with low price‐to‐book ratios. The results suggest that IR adoption mitigates information asymmetry and disclosure of high‐quality information leads to lower capital costs. Moreover, our results remain robust to a series of robustness checks. Taken together, these findings provide evidence that IR disclosure, and high‐quality IR in particular, can serve as a strategic disclosure tool that contributes to improved market valuation through a reduction in the cost of equity capital, and that this practical benefit is particularly pronounced for firms in environmentally intensive industries with strong incentives for non‐financial disclosure, as well as for firms with low market valuations. Practitioner Points Firms hesitate to adopt integrated report (IR) because of its costs and operational burdens. By showing that IR adoption is associated with a reduction in the cost of capital, this study offers a concrete economic rationale to support firms’ adoption decisions and serve as an internal justification for the initial investment. The benefit of a reduction in the cost of capital is not driven solely by the act of issuing an IR; rather, improving the quality of IR disclosures is crucial for realizing a stronger cost‐of‐capital reduction. For analysts, IR can complement traditional financial information by improving the assessment of long‐term value creation and risk, which may help produce more credible forecasts and reduce estimation uncertainty—mechanisms consistent with a lower cost of capital.
Prior studies suggest that firms subject to SEC enforcement pay higher audit fees in subsequent years of release. We posit that those firms could have already paid higher audit fees prior to the releases because auditors may perceive the risk that firms committing fraud through their periodical audit and close communication with the top managements, thereby increasing fee premiums in advance. Using a sample of fraud firms manually collected from AAER and LR websites, we find that firms subject to SEC enforcement paid higher audit fees than control firms during and after committing fraud. We further break down the fraud firms into firms sanctioned by the SEC for committing accounting fraud (ACC firms) and firms sanctioned in violation of the Foreign Corruption Practices Act (FCPA firms). We perform our analyses using these two sub-samples and find that ACC firms pay higher audit fees after committing frauds, while FCPA firm pay higher audit fees before, during and after committing frauds. Importantly, we find that FCPA firms pay lager magnitude audit fee premiums compared to ACC firms. These findings are consistent with the suggestion in previous studies that incentives and consequences for committing accounting fraud and violating FCPA are different. In the additional test, we find that FCPA firms pay significantly higher audit fees than ACC firms, further supporting our finding that FCPA firms face higher audit fee premiums than ACC firms.
ABSTRACT This paper examines the linkages and transmissions of five Islamic‐real estate investment trusts (I‐REITs) listed on the Kuala Lumpur stock exchange in Malaysia. In general, the five I‐REITs do not co‐move and are not linked. When the price linkage of each I‐REIT is analyzed, however, two of them, KLCC and AME, co‐move. Regarding the transmission of the I‐REITs, only six cases are found out of 20 combinations. The prices of I‐REITs are formed almost independently in the I‐REIT market in Malaysia, which is not a unified market. The prices of KLCC and AME are formed to co‐move, with an influence going from AME to KLCC. The features of properties owned by each I‐REIT vary. When we invest in I‐REITs in Malaysia, we need to be aware of the effects of diversification function.
ABSTRACT Current estimates of the climate finance gap range from $4 to $6 trillion in annual funding requirements throughout the next decade. Achieving the goals negotiated in the recent 30th Conference of the Parties (COP 30) requires a coordinated finance mobilization campaign. Scaling climate finance can be achieved extensively and intensively. Extensively, climate finance growth occurs through an increase in the volumes of funding from donor countries and institutions. However, a key component of long‐run growth is intensive climate finance. We examine the co‐financing multiplier — the ratio of co‐financing mobilized per dollar of GEF grant — across projects in the Global Environment Facility (GEF), as a proxy for intensive climate finance growth. The choice of this multilateral fund as the object of this study is justified by the following: first, it is the core of the global climate finance architecture, second, it is the longest existing climate finance fund with ample data on projects dating back to the early 1990s; third, its impacts on climate mitigation and adaptation are measurable and its funding targets align with current climate finance demand. With an analytical sample of 5,066 projects across 8 replenishment phases spanning almost 35 years, three ordinary least squares (OLS) regression models were estimated to examine the determinants of absolute co‐financing volumes. This study provides an overview of the basic determinants of co‐financing and tests hypotheses using omnibus tests for group differences in parametric and nonparametric settings. Results suggest that larger project sizes tend to attract more co‐financing controlling for agency and focal area dummy variables; multifocal area projects on average mobilize more co‐financing than single‐focal area projects; multilateral development bank (MDB)‐implemented projects outperform United Nations (UN) agencies in additional finance mobilization, and projects that deploy non‐grant instruments, such as debt and equity, attract greater co‐financing from private and public institutions. This paper concludes by identifying various challenges in scaling climate finance.
This study examines whether, and in what ways, the state of the economy, particularly during recessions, affects firms' environmental, social, and governance (ESG) engagement. Using global firm-year ESG data from 2002 to 2023, with emphasis on the 2007 to 2009 Global Financial Crisis and the 2020 COVID-19 recession, we document a robust increase in ESG scores during downturns. Mechanism tests reveal the most substantial evidence for a survival channel: firms emphasize pragmatic, cost-effective ESG actions such as lowering direct emissions, limiting layoffs, and adopting crisis/ESG governance practices, including assurance. Robustness checks using PPP loan dependence and local unemployment rates confirm that economically harder-hit firms raise ESG scores during recessions. For the legitimacy channel, higher litigation risk is positively associated with ESG in levels but does not amplify further during recessions. Results for the stakeholder channel are mixed: although firms with stronger stakeholder support generally get higher ESG scores, their advantage narrows during recessions as other firms engage in ESG related behavior as well. Finally, difference-in-differences analysis show that recession-era ESG was not linked to improved post-crisis outcomes after 2008 but was positively related to operational outcomes after COVID-19, suggesting an evolution in the strategic integration of ESG.
We examine whether top management team (TMT) functional diversity affects financial statement comparability. Drawing upon upper echelons theory and the information sharing perspective in diversity research, we argue that TMT functional diversity produces more comparable financial statements due to better information sharing and integration. Using a sample of US firms, we find that financial statement comparability is positively associated with TMT functional diversity. We also find that the positive relationship between TMT functional diversity and comparability is more pronounced in firms with a poor information environment. Our findings remain robust after addressing endogeneity concerns. This study contributes to the existing literature by identifying TMT functional diversity as an important determinant of financial statement comparability.
This paper examines the relative weights assigned to three performance measures-stock returns, accounting earnings, and operating cash flows-in determining executive cash compensation. We find that returns receive the highest weight, followed by earnings, while cash flows carry the least weight. We further investigate how discretionary accruals influence the incremental weights placed on these performance measures. Guided by agency theory, we predict and find that as discretionary accruals introduce uncertainty into earnings, the weight on earnings decreases, the weight on returns declines to a lesser extent, and the weight on operating cash flows remains unchanged. Additional cross-sectional analysis suggests that traditional pay-for-performance models may not fully apply to firms in sin industries.
We analyze the share-repurchase intensity of U.S. software firms during 2015-2024, an industry distinguished by its extensive use of buybacks. Our study focuses on high-growth software firms and evaluates how their repurchase practices affect both market valuation and operating performance. The results reveal systematic differences in market and operating responses to share repurchases across growth stages. Repurchases by high-growth software firms are associated with less favorable market reactions, consistent with investors placing greater weight on retained capital and investment flexibility when firms face substantial growth opportunities. Among high-growth firms, larger repurchase programs are associated with weaker operating performance, whereas higher R&D intensity is associated with better outcomes.
This study investigates whether tax authority monitoring is associated with earnings mispricing, measured by post-earnings announcement drift (PEAD), in U.S. public firms from 2010 to 2021. We use two distinct proxies for monitoring: the resolution pattern of uncertain tax benefits and IRS download activity of firms' 10-K filings from EDGAR. We find that greater tax authority monitoring is associated with significantly stronger PEAD, suggesting that regulatory scrutiny may increase investor uncertainty and delay the incorporation of earnings news into stock prices. This effect is most pronounced in firms with higher levels of tax planning, where reporting opacity is greater. Additional analyses confirm the robustness of our results using alternative earnings surprise metrics, event windows, and tax planning proxies. These findings highlight tax authority oversight as a previously unrecognized institutional factor contributing to earnings mispricing, and they offer new insights into how enforcement interacts with firm disclosure environments to affect capital market efficiency.
This study is the first investigation of the relationship between corporate cash holdings and financial literacy (FL). We find that a one-standard-deviation increase in FL is associated with an 8%-27% reduction in corporate cash holdings, depending on the measure of FL used. Moreover, higher FL reduces the market value of excess cash, indicating that financially literate environments discourage value-destroying cash accumulation. The results remain robust across alternative definitions of FL and cash holdings, estimation methods, and country subsamples. We further rule out the influence of endogeneity, refinancing risk, and variation in cash needs. Additional analyses identify agency costs as the primary channel through which FL affects corporate liquidity policies. The evidence suggests that financial literacy mitigates the agency motive for holding cash and serves as an effective substitute for monitoring opportunistic firm behavior when formal country governance structures are weak.
This study examines the relationship between firms' political risk and their susceptibility to the environmental, social, and governance (ESG) issues. Using quarterly data of U.S. public firms from 2019 to 2022, we find that firms exposed to higher uncertainty in political matters have higher exposure to financial risk caused by material ESG issues. While previous studies report that, as political volatility rises, firms invest more in sustainability-related activities to maintain legitimacy, we show empirical evidence that corporate ESG risk scores still increase in the face of heightened political risk, suggesting that their ESG initiatives in reaction to political instability are ineffective in mitigating firms' exposure to ESG challenges. Political uncertainty creates negative sentiment toward political matters, which can signal an unfavorable environment for long-term sustainability developments, or higher ESG risks for firms. Our results also show that some strategic attributes, such as international presence and CEOs' generalist skills, can protect firms' ESG risk profiles from political turbulence.
This study examines whether and how industry-specialist auditors take into account client firms' corporate social responsibility (CSR) involvement and activities when pricing their assurance services. Studies examining the auditor pricing of CSR activities have provided mixed empirical evidence. Since industry-specialist auditors have the knowledge and expertise to better examine firms' CSR activities and see through any opportunistic behavior in a given industry, and to shed further light on the relationship between CSR activities and audit fees, we propose to investigate the audit pricing of CSR activities by industry-specialist auditors. In particular, we investigate whether industry-specialist auditors consider clients' CSR activities when determining their audit fees.The results of the present study indicate that, overall, client companies that engage more (less) in CSR activities pay lower (higher) audit fees when audited by industry-specialist auditors than when audited by non-industry-specialist auditors. This result corroborates the view that industry-specialist auditors incorporate CSR activities in their audit fees and that these fees are negatively associated with audit fees, suggesting that CSR activities are associated with lower audit and litigation risks.
This study investigates whether economic bonding between actuaries and their clients is associated with compromised professional objectivity, echoing concerns that led to auditing reforms under the Sarbanes-Oxley Act (SOX). Using hand-collected data from 1195 observations (2011-2015), we examine the association between actuarial fees and pension assumptions used for financial reporting. We find a significant positive association between expected rates of return (ERR) and fees, particularly among companies with higher pension contributions and capital expenditures. In contrast, discount rates show no such relationship, likely due to regulatory constraints. Further analysis reveals that higher fees are associated with inflated ERRs unsupported by actual investment performance, suggesting that economic ties may influence assumption selection. These findings are consistent with economic bonding concerns that may compromise actuarial objectivity, increasing the risk of earnings management. These results should aid auditors, analysts, and investors when scrutinizing pension accounting information.
Theory suggests that an ex ante commitment to voluntary disclosure may increase capital allocation efficiency and discipline managers to undertake more profitable investment. Consistent with this prediction, we find that a commitment to providing managerial earnings forecasts, a popular, forward-looking and truly voluntary form of disclosure, is associated with greater capital allocation efficiency and more profitable exercise of firm investment opportunities (IOS). Our regression results are robust to controlling for financial reporting quality (FRQ) and other firm-level determinants of investment efficiency and profitability, firm and industry fixed effects, alternative measures of IOS, alternative measures of future profitability, and adjustments for endogeneity in the voluntary disclosure commitment decision. We conclude that a commitment to voluntary disclosure through managerial earnings forecasts may benefit corporate investment efficiency and profitability.
We investigate the impact of gubernatorial re-election incentive and political factors on US public pension funds from 1990 to 2022. Our empirical analysis finds no significant overall relationship between gubernatorial re-election incentives and local bias in the full sample. However, the effect of gubernatorial re-election incentives on local bias is influenced by a state's level of corruption. Specifically, in states within the lowest corruption quantile, governors eligible for re-election tend to prioritize local investments to gain consistent support. In contrast, in states within the highest corruption quantile, heightened scrutiny may encourage re-election-eligible governors to adopt conservative investment policies that do not significantly influence local bias. Although re-election incentives may encourage politically motivated local investments in low-corruption states, they do not necessarily lead to negative outcomes. Instead, in these states, governors seeking re-election appear to positively influence pension fund performance and investment expenses, suggesting that electoral accountability may help align political incentives with prudent investment management. Additionally, we find that a change in the state governor's party affiliation is negatively associated with local bias, and Democratic governors appear to mitigate the impact of re-election incentives on local investment across both high- and low-corruption states. Other political variables do not exhibit statistically significant relationships with local bias.
Prior research on the value relevance of sales has produced mixed results, largely because it is difficult to isolate the information content of sales. Using a unique dataset of interim sales disclosures by retail firms, this study demonstrates that stock market investors react strongly to these stand-alone sales announcements, and that the value relevance of sales information arises primarily from growth in same-store sales (SSS). In a decomposition analysis, we find that interim sales disclosures provide more information to the market than earnings announcements and other disclosure events. We also find that interim SSS growth predicts a firm's future earnings and operating cash flows. Overall, this study presents new evidence on the value relevance of sales and contributes to the ongoing debate about whether U.S. retail companies should continue to provide interim sales disclosures.
We investigate the impact of redacting disclosures on bank loan contracts. Our findings indicate that firms that redact information have loans with significantly higher spreads, shorter maturities, and more restrictive covenants and face a greater likelihood they will be required to post collateral compared to firms that do not redact. Additionally, we find the relationship between redactions and loan fees is significantly shaped by characteristics of both the borrowing firm and the lender. These results align with the notion that redaction heightens information asymmetry, particularly for lenders, underscoring the financial costs firms incur when protecting proprietary information.
As digitalization accelerates, cybercrime has intensified in both scale and impact over the past two decades. This study aims to critically examine major cybersecurity events, assess them through the lens of routine activity theory, examine insight from three other established criminological and organizational theories, and address central questions: Why has cybercrime remained so pervasive? What underlying factors explain its persistence? Where do we currently stand, and what can be done to reduce the number and scope of events? This study evaluates six of the most influential cybersecurity events from 2005 to 2024 and analyzes them through the lens of the routine activity theory. Other theories such as general deterrence theory, socio-technical systems theory, and upper echelons theory are then examined to gain a deeper understanding of the cybercrime events. Analyzing these cases through the appropriate theoretical lens not only deepens our understanding of key vulnerabilities but also reveals why such breaches persist. Based on these insights, we offer recommendations to executive leadership teams. The selected cases demonstrate that cybercrime encompasses diverse offender motivations and systemic vulnerabilities that span multiple theoretical domains. The intersection of contributions from routine activity theory (RAT) and other theories reveals weaknesses in technical infrastructure, organizational behavior, and social influence. While technological safeguards can reduce risk, the incentive to exploit vulnerabilities continues to outweigh the investment in prevention, especially given limited legal deterrents and infrequent prosecution. This research offers an analysis of cybersecurity breaches with insight from RAT and broad consideration from three other theories to diagnose recurring patterns in high impact cybersecurity breaches. The analysis not only identifies persistent points of failure but also presents a range of strategic interventions weighing their practical benefits and limitations. The study highlights the inherent limitations of cybersecurity prevention to inspire future research.
We examine associations between management earnings forecasts and capital structure. We posit that incremental information in forecasts reduces capital providers' concerns about adverse selection. Pecking order theory suggests forecasts contribute differing amounts of information to different capital providers, shifting capital structure from trade credit to long-term debt, and from long-term debt to equity. Investment information risk theory submits that although creditors and equity holders share downside risk, creditors are more sensitive than equity holders to uncertainty related to the riskiness of firms' future investments because equity holders are the sole beneficiaries of investments' upside potential. Insomuch earnings forecasts provide investment information that is more meaningful to creditors, we expect a shift in capital structure from equity to credit as the forecast decreases outcome uncertainty. Using a sample of US-listed firms from 2003 to 2019, we find support for the pecking order theory, that firms issuing management earnings forecasts exhibit higher levels of equity-to-credit financing and long-term debt-to-trade credit financing. However, in cross-sectional tests, we also find evidence supporting the investment information risk theory, that forecasts shift financing from equity to credit and among creditors, from long-term debt to trade credit in firms with more growth opportunities. Our findings suggest firms' voluntary disclosures provide different amounts of incremental information to different capital providers, but that the relevance of the information provided may also differ across capital providers.
Using a novel climate policy uncertainty (CPU) measure based on emissions legislation, climate protests, and presidential statements, we show that in response to climate policy risk, firms tend to strategically reduce their future innovation, measured by patent counts, citations, and innovation value. Green innovation, however, is less vulnerable than non-green innovation. We argue that CPU constrains innovation through a precautionary motive: firms under high uncertainty face higher external financing costs and shift from prospector (innovation-oriented) to defender (cost-minimizing) strategies. Results are robust to instrumental variable estimation, firm fixed effects, and a difference-in-differences design exploiting the Paris Agreement as an exogenous shock. These findings underscore the strategic and policy implications of uncertainty in the transition to a low-carbon economy. Overall, our results provide insights into policy implications.
