This study examines how firms’ adoption of corporate social responsibility frameworks (CSRFs) that follow different user orientation approaches affects information asymmetry in capital markets. We draw on novel hand‐collected adoption data from seven established CSRFs for a sample of STOXX Europe 600 firms from 2017–2020. Our findings reveal that CSRFs that primarily target investors are associated with lower information asymmetry, whereas those that target a broad group of stakeholders are not. In particular, we find that capital markets place importance on firms’ common reporting practice of adopting multiple investor‐oriented CSRFs simultaneously. Our analysis finds that the climate‐change‐focused CSRFs are the primary forces behind reducing information asymmetry. Our results have important implications for the current standard‐setting initiatives of the European Financial Reporting Advisory Group and the International Sustainability Standards Board as well as for firms adopting CSRFs.

Finance theory suggests that effective hedging reduces cash flow volatility, enabling firms to invest in profitable projects they might otherwise avoid. We argue that this association holds only for derivatives designated for hedge accounting, which requires the fulfillment of strict effectiveness criteria. Our evidence shows that only designated derivatives are positively associated with future investments, indicating that hedge accounting serves as a helpful signaling device for stakeholders regarding the success of firms' hedging programs. However, firms using complex hedging strategies seem unable to designate some of their successful derivatives due to the oftencriticized strict criteria for hedge accounting.

This study investigates the relationship between audit staff satisfaction (measured by crowd-sourced employer reviews) and audit quality in the private client setting. In this setting, extrinsic incentives to provide high quality audits - such as regulatory enforcement, reputational pressure, and litigation costs - are less pronounced than for listed client audits. We find audit staff satisfaction, an important intrinsic motivational factor, is positively and significantly associated with audit quality in the private client setting. Consistent with prior research, we find no significant association between staff satisfaction and audit quality for listed clients. The significant association in the private client setting primarily applies to non-Big 4 firms, for which extrinsic factors play a less influential role than for Big 4 firms. Moreover, we show staff satisfaction moderates possible negative effects of conditions, such as the provision of non-audit services and longer audit tenure, which may pressure auditors to compromise audit quality. Overall, these findings provide new insights about the influence of audit input factors on audit quality.

This paper addresses the effects of clients' carbon risk on audit pricing. Using data from 438 EU companies for the period 2013-2019, we find a positive relationship between carbon risk (measured by the level of carbon emissions) and audit fees. Furthermore, we find that participation in the European Union's Emission Trading System, a limited market and regulation scheme to mitigate special industries' Greenhouse Gas emissions, strengthens the positive relationship between carbon risk and audit fees. Insights from additional tests indicate that auditors price carbon risk particularly for large clients that are under greater public scrutiny and that the increase in fees rather stems from a risk premium charged by the auditor than higher audit effort. With interest in climate change developing rapidly across society, practice and research combined with the increasing importance of reducing carbon risk, our findings are timely and should thus appeal to a wide variety of recipients.

In this study, we investigate whether auditors consider their clients’ climate change-related external risks when making audit pricing decisions. Using county-level proxies based on the number of declared natural disasters and the level of societal climate change awareness, we discover that clients with greater exposure to climate change risks pay significantly higher audit fees. After performing several additional tests, we conclude that auditors consider climate change risks and their potential consequences as a systematic business risk that is factored into the audit fees. For instance, we demonstrate that clients’ climate risk exposure has become more strongly associated with audit pricing in recent years, as climate change has gained greater importance in public debate. Moreover, we discover that auditors place a greater emphasis on clients’ climate risks when they themselves are located in regions with higher climate change awareness, indicating that auditors’ climate change perception also matters. Given the growing interest in climate change-related risks in practice and research, as well as the significance expected to be placed on these risks in the future, our findings are timely and should appeal to a wide range of readers, including investors, regulators, and scholars.

This study investigates the effect of job satisfaction on investment efficiency. To operationalize job satisfaction empirically, we employ a novel measure based on crowdsourced employer reviews. Considering the as yet under-researched and less regulated private firm setting, in which internal characteristics such as employee satisfaction should play a more important role for corporate actions, we find that our measure for job satisfaction has a positive impact on investment efficiency. High job satisfaction seems to alleviate problems related to moral hazard and adverse selection resulting from information asymmetries, which ultimately improves corporate investment efficiency. We further show that high job satisfaction reduces particularly the likelihood of underinvestment, where profitable investment projects are not carried out. Our study demonstrates the importance of cultivating a positive workplace environment with contented employees, which does benefit fundamental corporate actions.

We outline analytically that, when testing different implied cost of capital (ICC) estimates for validation by employing the Vuolteenaho (2002) framework, the cash-flow news in the validation framework should be defined in a way that considers the ICC model specific assumed sequence of future cash flows. This is based on market expectations, as proxied by analysts' forecasts. We then propose adjusting the cash-flow news proxies accordingly and implement these adjustments empirically. Consistent with the theoretical predications, the results from these tests show that ICC estimates are significantly positively related to realized returns. Informed by these findings, we employ the adjusted cash-flow news proxies in the validation framework and compare the correlation between adjusted and unadjusted for analysts' bias ICC estimates with realized returns. These tests show no difference in these correlations. This suggests that it is not the analysts' bias that weakens the validity of ICC estimates, as argued by prior literature. It is the proxies used in the validation framework that lead to the suggestion in removing analysts’ optimism from ICC estimates. Overall, our proposed alternative framework not only unlocks the gate for extensive use of the existing ICC estimates but also enables future researchers to develop more reliable and meaningful ICC estimates.

This paper raises the question whether investors can learn something from social media sentiment that they do not already know from (existing) financial information disclosed by companies and financial analysts. Therefore, the relationship between financial information and Refinitiv's MarketPsych social media sentiment index is explored. The paper introduces adjusted social media sentiment, which corrects social media sentiment for the impact of financial information such as earnings surprises, analyst forecast revisions, new dividends, and 8-K filings. It turns out that adjusted social media sentiment is related to subsequent short-term stock returns. This is particularly true for stocks with negative (adjusted) sentiment. Moreover, looking at long-term holding returns the paper does not find compelling evidence for reversals suggesting that (adjusted) social media sentiment reflects information about the prospects of the firm.

Following calls for further research, this study evaluates the determinants and motives behind private companies' decision to capitalise development costs by using mixed methods. While prior literature and expert interviews indicate initially that private firms may be motivated opportunistically, subsequent archival analyses show that development costs are capitalised to meet benchmarks and ameliorate poor profitability. Additionally, interview evidence emphasises that debt covenant violation avoidance and increasing merger and acquisition (M&A) values are important drivers for capitalisation, whereas management compensation schemes do not seem to influence their accounting policy. Moreover, findings imply a negative association between firm size and the capitalisation of development costs. Expert interview evidence indicates that smaller companies are more likely to have financing needs, suggesting that capitalisation is employed to signal future economic benefits to investors. Conversely, the motivation for larger companies which are more likely to expense may be grounded on risk avoidance from future impairments.

This exploratory study investigates research and development (R&D), specifically the relationship between development costs capitalization and the credit ratings of R&D-active private companies. Results indicate that uncertainty surrounding R&D investment is a leading factor in the credit risk assessment of R&D-active private companies. Hence, R&D intensity is seen as negatively impacting credit ratings. Although credit rating assessors are generally more concerned about downside risks, they seem to take into account different degrees of uncertainty. Consequently, our findings reveal that capitalized development projects that signal likely future economic benefits lead to better creditworthiness. Moreover, we infer from our additional analyses that credit rating assessors do consider the reasons of R&D-active private companies for capitalizing development costs. This conclusion is derived from evidence that discretionary capitalization ratios employed in opportunistic earnings management do have a significantly negative association with credit ratings. Conversely, non-discretionary counterparts have a significantly positive effect.

Client-and auditor-related attributes are well-documented determinants of audit pricing, but the number of empirical archival studies investigating the effects of external factors on audit pricing has grown rapidly in recent years. We extend the traditional framework used to classify audit fee research by adding a novel structure that focuses on political, economic, social, technological, legal, and environmental/ecological factors (a PESTLE analysis). We provide a systematic review of the literature on external factors and audit pricing, and we suggest opportunities for future research. Our review reveals that audit researchers focus on legal factors in terms of regulatory changes, and we find increased attention to political, economic, and social factors. However, despite increased public scrutiny, technological and environmental/ecological factors remain under-researched. Overall, our review demonstrates the importance of considering external factors to gain a more complete understanding of the audit pricing framework, especially in terms of global and regional variations.

This research analyses the link between fundamental information, social media sentiment, and stock returns from 2010 to 2018. We are interested in whether social media sentiment provides additional information to already published fundamental information, such as financial information and analysts forecasts. Therefore, we explore the relationship between fundamental information and sentiment. We find that unexpected earnings, analyst forecast revisions, new dividends, and 8-K filings have a significant impact on sentiment. We introduce the adjusted social media sentiment, which corrects social media sentiment for the impact of this fundamental information. It turns out that adjusted social media sentiment is related to the subsequent stock returns. Moreover, most of social media sentiment's total effect emerges from adjusted sentiment. In particular, stocks with negative sentiment tend to have negative subsequent short-term returns. It is, thus, important to distinguish between positive and negative sentiment. Subsequent long-term returns are more mildly affected suggesting that the impact of negative sentiment seems to be permanent.

Client- and auditor-related attributes are well-documented and often synthesized determinants of audit pricing. Particularly in recent years, the audit fee literature has undergone rapid growth in empirical archival research regarding the effect of external factors on audit pricing. We extend the framework of audit fee research by adding a novel structure—a PESTLE analysis. We provide a systematic review of the literature on external factors and audit pricing and suggest opportunities for future research. Our review reveals that audit researchers particularly consider legal factors in terms of regulatory changes, together with increased attention on political, economic, and social factors. Areas that remain under-researched include technological and environmental/ecological factors, despite coming under increased public scrutiny. Overall, our review demonstrates the importance of considering external factors to form a more complete picture of the audit pricing framework and to understand global and regional variations in auditing.

In recent years, we have seen an increasing interest in the country-level differences in audit environments as they might have a pervasive impact on how financial statement audits are conducted around the world. We contribute to this emerging stream of research in three important ways. Firstly, we provide a comprehensive synthesis of country-level determinants that have been employed in previous multinational auditing research. Secondly, we document economically significant differences in the overall levels of audit pricing between countries, which we interpret as a compelling evidence that audits are conducted differently in different countries. Lastly, we explain these pricing differences between countries with a large set of country variables identified in our synthesis of prior multinational auditing research. We find not only that economic and regulatory characteristics explain the most of the differences in audit pricing between countries but also that differences attributable to sociological characteristics seem to be important in the conduct of audits. As auditing as a service and profession has become increasingly globalized, our study should be of interest to a wide range of readers including researchers, practitioners and regulators.

We investigate the impact of an informal social attribute on cost behavior. More specifically, we examine the effect of generalized trust (trust in others) on cost stickiness. Using a large international sample from 44 countries, we find that generalized trust significantly increases cost stickiness. Important rationales for this result are that managers in more trusting societies are more optimistic and are committed to stable, long-term employment relationships. This study makes a significant contribution in understanding cost stickiness differences across the globe. Our results further complement prior research which has found, to the contrary, that trust and cost stickiness are negatively associated at the local level. Hence, our study corroborates the importance of distinguishing between local social capital and global generalized trust concerning their effects on economic outcomes.

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non-financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms' motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub-sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

The purpose of this study is to validate the drivers of voluntary audit in small companies identified in previous research and uncover additional determinants related to agency conflicts with owners. For our research we use the German institutional setting, documented in the literature as being very different from its Anglo‐Saxon equivalent. Based on a random sample of 405 small companies responding to a postal questionnaire survey, we find that the proportion of owners not involved in management, the subsidiary status of a company, a company's legal form, and the importance of financial statements' information to management activities all increase the likelihood of voluntary audit. In contrast, firms that outsource accounting tasks to an external expert are less likely to opt for voluntary audit, suggesting that an external expert's involvement substitutes for an external audit. In addition, owing to the absence of a statutory audit history for small companies in Germany, we find that voluntary audits are less common compared with findings from previous studies.