Variable definitions
| Variable | Description |
|---|---|
| IE5 and IE10 | =|VR (1, k) −1| × (−1); where VR (1, k) is the return variance ratio, i.e. 1/k times the ratio of the k-day return variance to the 1-day return variance. IE5 is computed using VR (1, 5) and IE10 using VR (1, 10) |
| Fog | =0.4 × [number of words/number of sentences + 100 × (number of words with more than three syllables/number of words)] computed exactly as in Li (2008) |
| FK | =0.39 × [number of words/number of sentences] + 11.8 × [number of syllables/number of words] – 15.59 |
| SMOG | =1.043 × sqrt [30 × number of words with more than two syllables/number of sentences] + 3.1291 |
| B_SIZE | =The number of directors on the board of directors |
| B_IND | =The percentage of independent directors on the board of directors |
| InstOwn | =The percentage of the company’s shares owned by institutional owners |
| AudType | =1 if the auditor is a private audit firm, 0 otherwise |
| LnFee | =The natural log of statutory audit fees |
| AudChange | =1 if the auditor switched, 0 otherwise |
| AudTenure | =Auditor tenure in years |
| AudOpin | =1 if the audit opinion is unqualified, 0 for the qualified audit opinion |
| ARL | =Audit report lag, days between a firm’s fiscal year-end and the audit report date. |
| Accruals | =Total accruals, measured as income before extraordinary items less operating cash flows, all divided by total assets |
| Size | =Log of the market value of equity |
| AssetGrowth | =The annual percentage change in total assets |
| InvRec | =Some of the firm’s receivables and inventory divided by its total assets |
| ∆Lev | =LEV (total debt divided by total assets) in year t minus LEV in year t-1 |
| ROA | =Operating earnings deflated by total assets |
| Loss | =1 if net income is negative, and 0 otherwise |
| Segment | =Natural logarithm of the number of business segments |
| ALTZ | =Altman’s Z-score is computed as: [(1.4 × retained earnings + sales + 3.3 × pre-tax income +1.2 × (current assets−current liabilities)) ÷ total assets] |
| LnAge | =Natural log of the number of years from the establishment of a client firm |
| Aturn | =Asset turnover, measured as sales divided by total assets |
| FogFS | =Readability score of financial statements contemporaneous with the audit report, calculated using the Fog index |
| FC | =Natural logarithm of the number of footnotes in the financial statements |
| Year, Industry, Audit Firm, and Firm Fixed Effects | =Year, industry, audit firm, and firm fixed effects are included |
| Variable | Description |
|---|---|
| =|VR (1, | |
| =0.4 × [number of words/number of sentences + 100 × (number of words with more than three syllables/number of words)] computed exactly as in | |
| =0.39 × [number of words/number of sentences] + 11.8 × [number of syllables/number of words] – 15.59 | |
| =1.043 × sqrt [30 × number of words with more than two syllables/number of sentences] + 3.1291 | |
| =The number of directors on the board of directors | |
| =The percentage of independent directors on the board of directors | |
| =The percentage of the company’s shares owned by institutional owners | |
| =1 if the auditor is a private audit firm, 0 otherwise | |
| =The natural log of statutory audit fees | |
| =1 if the auditor switched, 0 otherwise | |
| =Auditor tenure in years | |
| =1 if the audit opinion is unqualified, 0 for the qualified audit opinion | |
| =Audit report lag, days between a firm’s fiscal year-end and the audit report date. | |
| =Total accruals, measured as income before extraordinary items less operating cash flows, all divided by total assets | |
| =Log of the market value of equity | |
| =The annual percentage change in total assets | |
| =Some of the firm’s receivables and inventory divided by its total assets | |
| =LEV (total debt divided by total assets) in year | |
| =Operating earnings deflated by total assets | |
| =1 if net income is negative, and 0 otherwise | |
| =Natural logarithm of the number of business segments | |
| =Altman’s Z-score is computed as: [(1.4 × retained earnings + sales + 3.3 × pre-tax income +1.2 × (current assets−current liabilities)) ÷ total assets] | |
| =Natural log of the number of years from the establishment of a client firm | |
| =Asset turnover, measured as sales divided by total assets | |
| =Readability score of financial statements contemporaneous with the audit report, calculated using the Fog index | |
| =Natural logarithm of the number of footnotes in the financial statements | |
| =Year, industry, audit firm, and firm fixed effects are included |
Source(s): Authors’ own work
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