Optimistic tone and audit fees: Some Australian evidence

Castro, Vincent Bicudo de; Gul, Ferdinand A.; Muttakin, Mohammad Badrul; Mihret, Dessalegn Getie

doi:10.1111/ijau.12165

Cited by 29 publications

(21 citation statements)

References 57 publications

(147 reference statements)

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“…Sentiment of messages reflected in annual reports is positively related to audit fees, indicating that a greater proportion of positive tone messages requires more attention from auditors. These findings are contradictory to other studies that have been performed for nonbanking entities (Bicudo de Castro et al, 2019;L. Chen et al, 2018).…”

Section: Resultscontrasting

confidence: 99%

“…Irrespective of the estimation methods and model applied, there exist a positive relation between the auditor fee and the positive sentiment. From this perspective, our study contradicts Bicudo de Castro et al (2019) in respect of the banking sector and high-risk economy. This relation is, however, unstable in terms of time effects.…”

Section: Discussioncontrasting

confidence: 79%

“…Smales (2016) found the asymmetric relationship between the sentiment of newswire messages for a set of banks and changes in credit measures: the LIBOR-OIS spread and the CDS spread. Recently, (Bicudo de Castro et al, 2019) reported that annual reports that convey an optimistic tone are associated with lower audit fees. Their analysis was based on the Australian Stock Exchange and excluded firms from the financial sector.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Audit fee and banks’ communication sentiment

Staszkiewicz

Karkowska

2021

Economic Research-Ekonomska Istraživanja

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The study verifies the relationship between the audit fee and reporting sentiment in the banking industry. The research adopts panel data from a sample of 490 commercial banks across 43 US states for years 2000-2016. The results indicate that the audit fee is affected by the sentiment and is subject to time development. The research shed light on the nature of auditor relations in the specific economic context of the US. The results add to the science new and robust evidence on attitudes towards asymmetry friction in the supervised market. The Financial Authorities might benefit from the presented results while preselecting the entities for on-site inspection.

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Section: Resultscontrasting

confidence: 99%

Section: Discussioncontrasting

confidence: 79%

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Audit fee and banks’ communication sentiment

Staszkiewicz

Karkowska

2021

Economic Research-Ekonomska Istraživanja

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“…Our study conforms to a growing literature in behavioral accounting and finance research that underlines the importance of CEO optimism in explaining various firm's behavior, including their debt policy (Ataullah et al, 2018); investing and financing policies (Heaton, 2002); innovation (Hirshleifer et al, 2012); welfare (Hilary et al, 2016); holding cash (Huang-Meier et al, 2016); audit fees (De Castro et al, 2019); and incentive compensation (Otto, 2014).…”

Section: Introductionsupporting

confidence: 84%

“Look on the bright side”: CEO optimism and firms' market valuation

Alshorman

Shanahan

2021

PAR

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Purpose Previous research suggests that a CEO’s attitude can impact a firm’s performance. More particularly, there appears to be a link between the CEO’s revealed level of optimism and firm’s market value. The purpose of this paper is to measure the level of optimism revealed by Australian CEOs in their shareholder letters and compares this with their firms’ current and future valuations. Design/methodology/approach This study assesses the CEO’s level of optimism using text analysis of the annual letters to shareholders in 180 Australian-based firms from 2010 to 2013. The market valuation of their companies over the same period is calculated using Tobin’s Q, and the results compared with the level of CEO optimism. Findings Comparing the level of revealed optimism with their firms’ valuations over four years, CEO optimism is positively correlated, both currently and prospectively with firm valuation. Given the period under study immediately followed the global financial crisis (GFC), the results suggest CEO optimism may be an important factor in adding to firm’s market resilience. Research limitations/implications The study examines the link between revealed CEO optimism and firm valuation over a turbulent period of the business cycle. While the sample period follows the GFC, and Tobin’s Q has some known deficiencies, the results imply that further research should be undertaken to examine the importance of CEOs tone and communicated attitudes on their firms’ financial outcomes. Practical implications The link between CEO optimism and the firm’s valuation suggest that shareholders and boards should pay particular attention to the values, cognitions and psychological and demographic characteristics of top executives when selecting CEOs. In particular, the results suggest that given two otherwise similar CEOs the one whose record of communication is optimistic should be preferred over a similarly qualified but less sanguine individual. Originality/value The paper represents the first study demonstrating the link between CEO’s communicated optimism and Australian firms’ valuations. The study uses three different measures of optimism to improve the robustness of its conclusions, and a comprehensive measure of firm value – Tobin’s Q. It is the first to quantify the association between CEO optimism and firm value shortly after a period of financial upheaval (the GFC). The findings indicate that CEO optimism contributes significantly to firm value. The study also tests whether “excessive” optimism negatively impacts firm performance and conclude there is no evidence of this in the sample period. The study suggests that more research should be done to examine the contribution of positive business attitudes to periods of economic stress.

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“…Several studies examine whether companies use tone in qualitative disclosures to convey fundamental information. Bicudo de Castro et al (2019) find that annual reports that convey positive tone are associated with lower audit fees. Davis et al (2012) find that the increase in tone optimism of earnings press releases leads to an immediate stock price response to earnings announcement, and Davis and Tama-Sweet (2012) argue that managers have incentives to use tone strategically in their qualitative disclosures and find that tone pessimism predicts poor future performance.…”

Section: Hypothesis Developmentmentioning

confidence: 88%

Audit committee disclosure tone and earnings management

Al‐Shaer

Zaman

2021

JAAR

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PurposeThis paper examines the effect of audit committee (AC) reporting, measured by the tone of audit committee disclosures, in improving financial reporting quality as proxied by earnings management.Design/methodology/approachThe authors focus on the textual properties of AC reports, particularly the tone of AC disclosure, and their impact on financial reporting quality proxied using real and accruals-based earnings management. For additional analysis, the authors use a financial reporting index and matched sample. The analysis is based on a sample of UK FTSE 350 firms.FindingsThe analysis suggests that AC reports are not boilerplate but varied in language. The authors find AC reporting is negatively associated with both real and accruals-based earnings management. In our additional tests, the authors find a positive association between financial reporting quality index and reporting tone.Research limitations/implicationsOverall, this paper provides baseline evidence for future research and policy making and reveals that ACs reporting what they have done increases transparency and impacts on reporting quality.Practical implicationsOverall, this paper suggests that the tone of AC reports seems to convey information that affects the communication function of AC reporting and thereby helps to improve reporting quality.Originality/valueThough the importance of AC disclosures in improving reporting quality is well recognised in policy guidelines and governance recommendations, no study has employed computer-based textual analysis of AC reports and investigated the effect of AC disclosure tone and the role it can play in achieving higher reporting quality.

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Optimistic tone and audit fees: Some Australian evidence

Cited by 29 publications

References 57 publications

Audit fee and banks’ communication sentiment

Audit fee and banks’ communication sentiment

“Look on the bright side”: CEO optimism and firms' market valuation

Audit committee disclosure tone and earnings management

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