| Main variables of interest | |
| Hedge fund intervention | Indicator equals one if the firm experiences hedge fund activism in year t, zero otherwise |
| ICW | Indicator equals one if firms report at least one internal control weakness under section 404 in year t, zero otherwise |
| Control variables | |
| Analyst following | Number of analysts covering the firm and the data are obtained from I/B/E/S |
| Auditor change | Indicator equals one if the firm experienced an auditor change within the previous two-year window (as measured in audit analytics), zero otherwise |
| Audit committee | Indicator equals one if the firm experienced an auditor committee in year t, zero otherwise |
| Big4 | Indicator equals one if a SOX 404 opinion is provided by a “big Four” audit firm, as listed in audit analytics (i.e. Deloitte, Ernst and Young, KPMG or PricewaterhouseCoopers), zero otherwise |
| Firm age | The difference between year t and the first year a firm appears in the compustat database |
| Segment HHI | Herfindahl–Hirschman index of sales in business segments, as reported by compustat |
| Institution | The percentage of ownership held by institutional investors using the most recent 13F filing data. Assume 0 for any period when the company is listed on an exchange, but 13F filling does not have data |
| KZ index | Measure of financial constrain at the end the of year using the model in Kaplan and Zingales (1997) |
| Leverage | Sum of long-term debt (DLTT) and current liabilities (DLC) scaled by total market value of common equity at the end of the year (CSHO × PRCC_F) |
| Payout yield | Calculated as the sum of dividends (DVC) and preferred dividends (DVP) divided by net income before extraordinary items |
| Prior loss | Indicator equals one if the firm reports a negative income before extraordinary items (IB), zero otherwise |
| PPE | Natural log of property, plant, and equipment (PPENT) |
| Return | Stock-market returns from the previous year |
| ROA | Pretax income (PI) divided by lagged assets (ATt−1) |
| R&D | Research and development expense (XRD) scaled by lagged assets (ATt−1) |
| Sales growth | Current year’s sales (SALE) minus prior year’s sales divided by prior year’s sales |
| Size | Natural log of total assets (AT) |
| Tangibility ratio | Tangibility ratio defined as property plant and equipment (PPEGT) divided by lagged assets (ATt−1) |
| 1/Asset | 1/Asset equals to one divided by total assets (AT) |
| ΔRev-ΔAR | ΔRev is change in revenue (REVT) between t and t−1. ΔAR is change in receivables (RECCH) between t and t−1 |
| Additional variables used in subsequent tests | |
| Litigation risk | Indicator equals one if the firm is sued for accounting-related litigation in the current year, as listed in audit analytics, zero otherwise |
| Kacc | The performance-adjusted discretionary accruals using the methodology in Kothari et al. (2005). Specifically, the residuals from cross-sectional regressions estimated by year and industry (two-digit SIC code) from the following regression model: Total accruals = β0*1/Assetst−1+β1(ΔRev − ΔAR) + β2PPE + β3ROA + ε. Total accrual is calculated using the cash-flow method (IBC-OANCF + XIDOC). ΔRev is change in revenue. ΔAR is change in receivables between t and t−1. PPE is property, plant and equipment. ROA is income before extraordinary items. All variables are scaled by total assets measured at the beginning of the year (AT). We include industries with at least ten firm observations in each industry-year |
| Restate | Indicator equals one if firms announce a restatement during the current fiscal year, as listed in audit analytics, zero otherwise |
| Hedge fund intervention | Indicator equals one if the firm experiences hedge fund activism in year |
| ICW | Indicator equals one if firms report at least one internal control weakness under section 404 in year |
| Analyst following | Number of analysts covering the firm and the data are obtained from I/B/E/S |
| Auditor change | Indicator equals one if the firm experienced an auditor change within the previous two-year window (as measured in audit analytics), zero otherwise |
| Audit committee | Indicator equals one if the firm experienced an auditor committee in year |
| Big4 | Indicator equals one if a SOX 404 opinion is provided by a “big |
| Firm age | The difference between year |
| Segment HHI | Herfindahl–Hirschman index of sales in business segments, as reported by compustat |
| Institution | The percentage of ownership held by institutional investors using the most recent 13F filing data. Assume 0 for any period when the company is listed on an exchange, but 13F filling does not have data |
| KZ index | Measure of financial constrain at the end the of year using the model in |
| Leverage | Sum of long-term debt (DLTT) and current liabilities (DLC) scaled by total market value of common equity at the end of the year (CSHO × PRCC_F) |
| Payout yield | Calculated as the sum of dividends (DVC) and preferred dividends (DVP) divided by net income before extraordinary items |
| Prior loss | Indicator equals one if the firm reports a negative income before extraordinary items (IB), zero otherwise |
| PPE | Natural log of property, plant, and equipment (PPENT) |
| Return | Stock-market returns from the previous year |
| ROA | Pretax income (PI) divided by lagged assets (AT |
| R&D | Research and development expense (XRD) scaled by lagged assets (AT |
| Sales growth | Current year’s sales (SALE) minus prior year’s sales divided by prior year’s sales |
| Size | Natural log of total assets (AT) |
| Tangibility ratio | Tangibility ratio defined as property plant and equipment (PPEGT) divided by lagged assets (AT |
| 1/Asset | 1/Asset equals to one divided by total assets (AT) |
| ΔRev-ΔAR | ΔRev is change in revenue (REVT) between |
| Litigation risk | Indicator equals one if the firm is sued for accounting-related litigation in the current year, as listed in audit analytics, zero otherwise |
| Kacc | The performance-adjusted discretionary accruals using the methodology in |
| Restate | Indicator equals one if firms announce a restatement during the current fiscal year, as listed in audit analytics, zero otherwise |
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