Despite rising expectations for firms to fulfil environmental responsibilities, there is increasing emphasis on collaborative efforts between firms and governments to tackle sustainability challenges. This study demonstrates that governments can adjust tax enforcement to motivate such collaboration. Drawing on the theoretical perspective of government–firm reciprocity and leveraging China's low‐carbon city pilot program, we examine how governments relax tax enforcement to incentivize firms’ contributions to environmental goals. Using a multi‐period difference‐in‐differences approach, we identify two temporal stages of reciprocity. First, pilot city governments, aiming to reduce carbon emissions, relax tax enforcement, thereby lowering firms’ tax burdens to stimulate environmental effort. Second, firms use the resulting financial slack to increase environmental investment and foster green innovation, which contributes to emissions reduction in pilot cities. Cross‐sectional analyses further reveal that pilot city governments are more likely to collaborate with firms with higher pollution levels, stronger governance mechanisms, and greater information transparency. These firms, benefiting from relaxed tax enforcement, are more likely to fulfil environmental responsibilities and support government targets. Additional analyses show that firms demonstrating stronger green commitments and contributing to emissions reduction subsequently receive greater government subsidies. Overall, our study offers new insights into the interplay between environmental policies, government influence on tax enforcement, and firms’ green behaviour. It highlights how governments can leverage tax enforcement as a key mechanism to initiate partnerships with firms and foster collective efforts to address sustainability challenges.
We examine how political ideological dispersion within corporate boards influences firm innovation. Using a sample of US publicly traded firms from 2000 to 2020, we document a robust positive association between partisan divergence among directors and firm innovation outcomes. Firms with ideologically diverse boards exhibit higher patent counts, more patent citations, and greater patent value. To strengthen causal inference, we implement a difference-in-differences analysis around director deaths, as well as an instrumental variable approach, both confirming the positive effect of board ideological diversity on innovation. Further analyses indicate that this effect operates primarily through the board's advisory function rather than its monitoring role: the relation is stronger in firms with stronger internal and external governance, greater regulatory complexity, and higher industry innovation intensity. Moreover, we find that the positive influence of ideological diversity is amplified in periods of low political polarization, when constructive dialogue and information exchange among directors are more feasible. Overall, the findings highlight the value of ideological diversity in enhancing corporate innovation, and underscore how boards can leverage diverse political perspectives to improve strategic decision-making, particularly in a politically divided environment.
This paper examines empirically the association between sustainability restatements (SRS), that is, restatements in sustainability reports, and analyst forecast accuracy, measured by analysts' forecast errors for current-year earnings. We find that SRS are related to greater earnings forecast errors, especially when they are related to environmental or quantitative information (or predominantly to both simultaneously) and to error revisions. In terms of materiality, we find that value material revisions have a greater effect on analysts' forecasts than do nonvalue material revisions. However, we find only weak evidence that SRS that are related to material information according to the Sustainability Accounting Standards Board affect analyst estimates. We also show that the effects of SRS are influenced by firms' use of Global Reporting Initiative reporting standards. Overall, our findings are consistent with SRS impairing the forecast accuracy of financial analysts. However, our results indicate that external assurance on sustainability reports reduces the negative effects of SRS on forecast accuracy.
Extensive literature has examined audit committee (AC) characteristics, including members' prior experience and qualifications. However, much of this research uses static proxies for human capital, overlooking the potential for AC members to enhance their skills over time. In this study, we examine both the determinants and consequences of AC training. Regarding determinants, we find that the frequency of training sessions in the following year is higher in companies that have more active ACs, are larger, undergoing leadership changes, or facing greater financial reporting risk. Increased AC training is associated with higher audit fees and audit hours in the following year, particularly at partner and senior auditor levels. This suggests that better-trained ACs may demand more thorough and rigorous audits. These effects are more pronounced among AC members who hold CPA certifications, receive external training, and complete training prior to the fiscal year-end. Overall, our findings contribute to the literature on AC effectiveness by highlighting the dynamic nature of human capital and underscoring the importance of ongoing professional development.
Identifying the determinants of systemic risk contributes to global financial stability. However, the role of language in such risk remains underexplored. This study investigates how a future time reference (FTR) language shapes firms' systemic risk, measured by the Basel II/III ARIB (advanced internal rating approach) framework, in 41 countries and areas spanning the period 1985-2018. The empirical results reveal that strong FTR language reduces systemic risk. The results are robust when controlling for endogeneity concerns with instrumental variables, generalized method of moments (GMM), and high-dimensional fixed effects, as well as when eliminating concerns related to enormous economies and financial firms. Furthermore, we investigate how formal and informal institutions interact with the FTR language on firms' systemic risk. The empirical results indicate that well-developed formal and informal institutions that mitigate adverse selection and moral hazard issues also mitigate the negative role of FTR language in their systemic risk. This study contributes to the literature by exploring whether linguistic ambiguity amplifies firms' systemic risk and improves systemic risk management across regions with heterogeneous formal and informal institutions.
Taking advantage of the implementation of the new audit report standard and using a staggered difference-in-difference approach, this paper studies the effect of R&D key audit matters (R&D KAM) disclosure on corporate R&D manipulation in China. The findings show that the disclosure of R&D KAM reduces subsequent corporate R&D manipulation. Mechanism analysis validates that R&D KAMs decrease corporate R&D manipulation by attracting more regulatory inquiries, as well as increased attention from investors and the media. Further analysis indicates that R&D KAMs with higher readability and lower industry similarity have a more significant impact, and the effect is more pronounced in companies audited by Big 10 firms or audit firms with higher industry expertise, in non-state-owned enterprises, firms with lower analyst coverage, or companies located in regions with lower marketization and stricter tax enforcement, as well as those listed on the boards requiring higher R&D or certified as high-tech enterprises. Finally, the constraining effect of R&D KAM disclosure on corporate R&D manipulation leads to enhanced innovation efficiency, diminished real earnings management, and a greater tax burden.
This study examines the impact of professional managers on audit report lag in Chinese state-owned enterprises (SOEs). Using a novel, manually constructed dataset of A-share listed SOEs from 2006 to 2020, we find that the presence of professional managers is associated with significantly shorter audit report lag. This relationship remains robust to various endogeneity tests, including difference-in-differences analysis, Heckman two-stage estimation, and high-dimensional fixed-effects models. Cross-sectional analyses reveal that the effect of professional managers is driven by improvements in the information environment, enhanced operational efficiency, and reduced audit risk. Our boundary condition analyses demonstrate that the relationship between professional managers and audit report lag is particularly pronounced in competitive SOEs, in firms with lower executive team faultlines, and when professional managers serve as CFOs. Our study contributes to the literature on SOE governance by highlighting the role of executive identity in shaping financial reporting timeliness and offers insights into the complex dynamics of China's dual-track management system in SOEs.
We test whether strengthening a country's capacity to raise public revenue disciplines corporate reporting. Drawing on a sample of 458 non-financial firms across 28 low- and middle-income economies (2007-2021), we proxy fiscal institution quality with the World Bank's Country Policy and Institutional Assessment revenue mobilization efficiency score, which rewards coherent tax policy and credible tax collection enforcement, serving as a proxy for national fiscal governance quality. Estimating performance-matched discretionary accruals and controlling for firm fundamentals, IFRS adoption, governance, and macro conditions, we find a strong, negative association between revenue mobilization efficiency and earnings management. The effect survives alternative accrual metrics; lag structures; and instrumental variable, Oster, and propensity score diagnostics, thereby underscoring its robustness. Dominance analysis shows that firm size and adoption of international accounting education standards are the chief firm-level deterrents, while tax burden, inflation, managerial professionalism, and university-industry collaboration transmit the macro-level impact. Results imply that incremental upgrades in tax administration, that is, e-invoicing, risk-based audits, timely dispute resolution, and governance reforms, curb opportunistic reporting where private monitoring is weak. By shifting the enforcement lens from securities regulation to fiscal capacity, the study introduces a novel, continuous proxy that connects state revenue mobilization to financial statement integrity and offers policy-makers a double dividend: higher tax receipts and cleaner financial disclosure.
We examine the association between continuous disclosure and investment efficiency within the context of Australia's unique regulatory setting for continuous disclosure. Based on 8,527 firm-year observations, we find that continuous disclosure is positively associated with investment efficiency and helps to mitigate both over-investment and under-investment. Further analysis shows that this positive association is stronger in firms with better corporate governance, higher institutional investor ownership, and greater financial analyst coverage. Our results hold for both price-sensitive and non-price-sensitive categories of continuous disclosure. Finally, mediation analysis indicates that information asymmetry serves as a key channel through which continuous disclosure influences investment efficiency. Given its role as a critical disclosure mechanism, these findings contribute to the ongoing debate on the costs and benefits of continuous disclosure and have important implications for standard-setters, regulators, investment analysts, and firms.
The Global Reporting Initiative (GRI) has become a widely adopted sustainability reporting framework. This study aims to examine whether GRI reports can, should, and do address planetary boundaries. To do so, the study develops a framework and method to assess the extent to which planetary boundaries-related information is captured in firms' GRI reports. We first map relevant GRI Standards to each of the nine planetary boundaries. Next, we use the mapped GRI Standards to develop a set of keywords for each planetary boundary and employ a text mining technique to analyze to what extent the GRI reports lodged by ASX100 companies from 2016 to 2020 capture planetary boundaries-related information. Results are validated against manual analyses and environmental, social, and governance (ESG) data. Our results show that some (albeit limited) planetary boundaries-related information can be found in the GRI reports of ASX100 companies. Disclosure is higher for companies with core businesses operating in sectors with higher environmental footprints, such as those in the materials and energy sector. Overall, however, the ability of GRI reports to capture planetary boundaries-related information in many critical areas is low. Researchers and decision-makers may consider using the framework and method to identify links between GRI reporting and the concept of planetary boundaries and assess potential planetary boundary risks for decision-making purposes. The framework can be further developed to foster the integration of planetary boundaries within the GRI Standards.
The demand for greenhouse gas (GHG) emissions disclosures is rising globally; yet, the credibility of such information remains uncertain when assurance is not mandated. Drawing on a sample of firms from 43 countries, this study examines the role of GHG assurance and the choice of assurance provider in the market value effects of GHG emissions. We find that the negative association between GHG emissions and firm value is mitigated when emissions disclosures are assured, particularly when assurance is provided by accounting firms. This effect is stronger for firms in carbon-intensive industries and stakeholder-oriented countries. Similar patterns are observed in countries with weaker legal environments, higher financial opacity, higher climate performance, and stronger Sustainable Development Goals commitments. Moreover, three key attributes of GHG assurance-assurance opinion, assurance standards, and the proportion of verified emissions-further reduce the adverse market impact of emissions. Our results remain robust after controlling for observable and double-selection biases and are validated through extensive robustness checks. These findings offer practical implications for investors, regulators, policymakers, and researchers as climate-related risks, including GHG emissions, increasingly become integrated into mainstream financial reporting under International Financial Reporting Standard S2.
This paper examines whether lenders are capable of discerning heterogeneity in the voluntary assurance of sustainability reports and how this capability influences corporate debt financing costs. Leveraging an international dataset between 2010 and 2019, we find that assurance only reduces debt financing costs for firms that exhibit above-industry-average sustainability performance, whereas firms with weak sustainability performance gain no such benefit. Lenders effectively penalize greenwashing by discounting cosmetic assurance but reward substantive verification for genuinely sustainable firms. This assurance premium is particularly strong amid high levels of ESG (environmental, social, and governance) rating disagreement, when third-party data is unreliable. Moreover, lenders incorporate a valuation premium for high-quality assurance engagements, particularly when the services are provided by accounting firms (particularly Big 4 firms), cover a broader scope, or involve deeper process rigour or more comprehensive statements. Further analyses demonstrate that the heterogeneity in the debt financing cost reduction effect of assurance, conditional on sustainability performance, tends not to be immediate but gradual. Over time, lenders learn to distinguish between credible assurance and symbolic efforts, adjusting pricing accordingly. Our study highlights the nuanced role of assurance in debt markets and underscores the importance of performance-aligned sustainability disclosure.
The effect of common ownership on executive incentives remains largely unexplored in family firms, where ownership is typically concentrated among controlling shareholders rather than institutional investors. Drawing on a sample of Chinese listed family firms, we find that controlling shareholder common ownership enhances compensation contract effectiveness by increasing executive pay-for-performance sensitivity. We further show that the governance effect is stronger in firms with higher information asymmetry and less controlling shareholder tunnelling; in firms with lower institutional ownership and media coverage; and in firms led by non-family CEOs, with fewer family members in management, and at the founder stage. These results suggest that common ownership by controlling shareholders is particularly effective when internal and/or external governance is weak and the controlling shareholders have monitoring incentives. Furthermore, controlling shareholder common ownership also reduces compensation stickiness, mitigates executive excess compensation, and increases the sensitivity of executive turnover to firm performance. In contrast, common ownership by non-controlling shareholders does not have a significant effect on executive compensation contracts in family firms. Overall, our findings suggest that common ownership by controlling shareholders can improve the effectiveness of executive compensation contracts.
This study explores the impact of environmental risks on audit fees by exploiting the establishment of environmental courts in China as an exogenous shock. Using a sample of listed companies in China, we find that auditors charge significantly higher audit fees following the establishment of environmental courts in their clients' domiciled prefectures. This effect is attenuated if their client firms have political connections or when the local government is under greater pressure in regards to economic development. We also identify litigation risks, financial risks, and reputation risks as three key channels underlying the impact of environmental risks on audit fees. Our key findings are amplified for firms audited by Big 10 audit firms or by auditors specializing in auditing firms in polluting industries. Finally, audit firms assign more environmental specialists to clients confronting elevated environmental risks. Overall, our results suggest that environmental risks are factored into audit fees.
This study investigates whether the implementation of International Financial Reporting Standards (IFRS) has an impact on shareholder value and foreign institutional participation in the Indian domestic stock market. The study specifically exploits the setting of regulatory demarcation in IFRS implementation based on a firm's net worth threshold and employs an event study approach coupled with difference-in-difference design to elucidate the effects of IFRS. The findings reveal a positive market reaction to IFRS-related announcements, leading to a notable 4.26% increase in stock price for firms mandated to adhere to IFRS reporting. Notably, in terms of shareholder value, a sustained long-term increase is observed only for firms that transitioned to IFRS. This increment accentuates the value enhancement brought about by IFRS in the Indian market. Additionally, the study also uncovers compelling evidence of a significant increase in foreign institutional investors' ownership in IFRS-compliant firms after the implementation. Overall, the study emphasizes the importance of IFRS frameworks for both domestic and foreign investors and yields relevant implications for diverse stakeholders engaged in the corporate reporting process, including firms, regulatory bodies, and standard setters.
This study investigates the impact of CEO risk-taking incentives, measured by Vega, on stock price efficiency, proxied by stock price delays. We show that CEO risk-taking incentives negatively affect stock price efficiency. Further analyses show that stock liquidity, accounting quality, and stock crash risk are potential channels through which CEO risk-taking incentives influence stock price delays. To address endogeneity issues, we conduct a difference-in-differences test and use instrumental variable estimation. Finally, we reveal the moderating role of CEO inside debt in the relationship between CEO risk-taking incentives and stock price efficiency. This study enriches the literature on equity-based executive compensation and offers insights into its impact on capital markets. The findings align with the managerial power perspective, indicating that equity-based compensation can serve CEOs' interests. The findings also have practical implications for boards of directors and policymakers about the use of equity-based incentives.
Until recently, there has been no mandatory standard governing climate-related disclosures in the financial statements of Australian firms, raising concerns about the quality and decision-usefulness of such disclosures. This study employs machine learning-based textual analysis to examine the nature and extent of climate-related disclosures in firms' financial statements and accompanying notes. We report several key findings. First, most firms do not disclose any climate-related information in their financial statements or accompanying notes, and, when they do, the disclosures tend to be limited. Second, firms that provide disclosures are typically larger, have greater growth opportunities, are audited by high-quality auditors, and are less likely to operate in industries most exposed to climate risk. Third, we find that climate-related financial disclosures are associated with accelerated depreciation and amortization, increased audit fees, and higher firm valuations. Taken together, these results suggest that 'voluntary' climate-related disclosures in Australian firms' financial statements and accompanying notes are informative.
This paper focuses on whether and how peer‐forced chief executive officer (CEO) turnover affects audit risk. This research reveals that auditors charge higher fees for client firms when product market peers dismiss CEOs. Its findings are consistent with the prediction that the forced turnover of peer firms transmits product market‐wide risk, prompting auditors to heighten risk assessments. Affected firms are also more likely to receive modified audit opinions and to meet or beat the zero earnings threshold, as well as exhibit higher abnormal accruals. These findings demonstrate that peer CEO dismissals amplify audit risks. This research also reveals that the positive influence of forced CEO turnover on audit risk is mitigated by a better information environment and longer audit tenure.
We explore whether and how external auditing influences bank clients' shadow banking activities by focusing on the impact of auditor-client geographic proximity. Using data from Chinese banks between 2000 to 2020, our findings indicate that the shadow banking activities of commercial banks decrease as auditor-client distance decreases, supporting the professional competence-enhancement effect. Mechanism analyses indicate that nearby auditors have a higher perception of risk and thus charge more audit fees and disclose more key audit matters and suppress shadow banking activities more for bank clients with higher risk. Analyses of heterogeneity show that the reduction effect is more pronounced for auditors with lower capabilities, banks facing higher competition, and banks located further from regulators. The path analysis demonstrates that geographic proximity between auditors and bank clients can reduce systemic risk by decreasing shadow banking activities. Finally, we provide further evidence that the reduction in on-balance-sheet shadow banking driven by nearby auditors leads to a partial shift toward off-balance-sheet shadow banking activities. These findings offer valuable insights for regulators seeking to control shadow banking systems and reduce systemic risks.
The International Accounting Standards Board has issued the exposure draft Management Commentary ED 2021/6 towards a revised Practice Statement, targeting deficiencies in narrative reporting practices. However, the work process remains on hold. Within this exposure draft, question 11a addresses the need for clarity (using plain language, avoiding jargon, and excessive technical terms) and conciseness (minimizing unnecessary repetition) in management commentary. We investigate whether the implementation of International Financial Reporting Standards (IFRS) influences the clarity and conciseness of management commentary, employing a new multidimensional complexity measure aligned with the 'clear and concise' criteria outlined in question 11a of the exposure draft. Our analysis reveals a decline in the clarity and conciseness of narratives when firms adopt IFRS, offering insights that directly address question 11a of the exposure draft. These findings support the proposals outlined in chapter 13 of the exposure draft and advocate for a metric-based approach consistent with the objectives of providing well-structured guidelines to enhance the preparation of management commentary. Furthermore, this research contributes to the broader domain of disclosure quality by focusing on narrative complexity.
