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...ject our results to a battery of sensitivity analyses. Reported significance levelssare two-sided and based on Newey-West standard errors that correct for both heteroskedasticitysand autocorrelation (=-=Newey and West 1987-=-).s5.1. IRR Estimates and Risk ProxiessThe purpose of this section is to validate the IRR measure by showing that it relates tosproxies capturing various sources of risk. As in Botosan (1997), Botosan...

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...ion can play a more prominent role in corporate governance mechanisms. Accordingly,sresearch has shown that investor protection is positively associated with the quality of financialsreporting (e.g., =-=Ball et al. 2000-=-).sWith respect to the role of auditing, Bushman and Smith (2001) argue that the economicsbenefits of financial accounting disclosures increase with the rigor with which the reportedsnumbers are audit...

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... of auditing (Khurana andsRaman 2004), we include auditor type (Big 4 versus non-Big 4) in our tests.12 Given their “deepspockets,” Big 4 auditors offer more insurance for the client (e.g., Dye 1993; =-=Palmrose 1988-=-).13sPrior literature further suggests that large auditors tend to provide higher-quality audits to reduceslitigation risk and to protect their brand name reputation (e.g., Becker, DeFond, Jiambalvo, ...

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...lied Required Rate of Return (IRR): Since expected (or ex ante) cost of equity capitalsis not directly observable, recent studies rely on observable measures of IRR to examine itssdeterminants (e.g., =-=Hail and Leuz 2006-=-; Khurana and Raman 2004).9sWe estimate IRR usingsfour models: two implementations of the Ohlson (1995) residual income valuation models(hereafter RIV model), the Ohlson and Juettner-Nauroth (2005) mo...

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...isk effect of auditing (Khurana andsRaman 2004), we include auditor type (Big 4 versus non-Big 4) in our tests.12 Given their “deepspockets,” Big 4 auditors offer more insurance for the client (e.g., =-=Dye 1993-=-; Palmrose 1988).13sPrior literature further suggests that large auditors tend to provide higher-quality audits to reduceslitigation risk and to protect their brand name reputation (e.g., Becker, DeFo...

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...akonishok, Shleifer, and Vishny (1994) document a positive association betweenslnBM and realized stock returns. lnBM also captures differences in accounting rules betweensregimes (Hail and Leuz 2006; =-=Joos and Lang 1994-=-). Following Hail and Leuz (2006), Gode ands16sThe CIFAR (1995) index is based on the inclusion/exclusion of eighty-five financial statement items, divided intosthe following seven categories: (1) gen...

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...f Return (IRR): Since expected (or ex ante) cost of equity capitalsis not directly observable, recent studies rely on observable measures of IRR to examine itssdeterminants (e.g., Hail and Leuz 2006; =-=Khurana and Raman 2004-=-).9sWe estimate IRR usingsfour models: two implementations of the Ohlson (1995) residual income valuation models(hereafter RIV model), the Ohlson and Juettner-Nauroth (2005) model (hereafter OJ model)...

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...oid costly lawsuits.s13sThe insurance effect refers to the investor’s ability to recover from auditors the losses sustained by relying onsaudited financial statements that contain misrepresentations (=-=Menon and Williams 1994-=-).s14sWe use Big4 to refer to both the current four largest audit firms as well as their predecessors during our samplesperiod (e.g., Big 6).s15sWe use the membership within the broadest industry cate...

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...deringsthe role of an audit and its impact on information risk. Audits lend credibility to accountingsinformation by providing independent verification of manager-prepared financial statements (e.g.,s=-=Simunic and Stein 1987-=-; Watts and Zimmerman 1986). Levitt (2000), among others, argues thatsinvestors cannot be expected to trust a company’s reported financial information withoutsconfidence in the auditor’s objectivity a...

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...s by different auditors gives rise to thespossibility that a positive value of incumbency could lead an auditor to approve a report that, insthe auditor’s judgment, may be viewed as an audit failure (=-=Magee and Tseng 1990-=-, 317).sTherefore, if high auditor remuneration creates economic bonding and a consequent lack ofsindependence, investors’ perceptions of reduced credibility will increase information risk ands5sultim...

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... receivable scaled bystotal assets (InvRec).11 In addition, we include a country-level variable that proxies for the extentsof litigation auditors face in a particular economy, the Wingate index (see =-=Choi and Wong 2005-=-).s10sTo be specific, for auditor fees we use the natural log of total auditor remuneration. As described above, thissmeasure includes fees for both audit and non-audit services. We obtain consistent ...

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...e rather than ex post returns (see also Fama and Frenchs1997; Vuolteenaho 2002).s9sto reduce measurement error in the estimates, we use the average of the four IRR measures (e.g.,sHail and Leuz 2006; =-=Boone et al. 2005-=-).sThe Appendix provides a detailed discussion of thesmeasurement of IRR for each model.sExcess Auditor Remuneration (ExcessFee): Our approach to computing excess auditorsremuneration follows prior re...

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...] – 1.s27sAs further sensitivity tests for IRR, we consider the role of analyst forecast bias andsanalyst forecast accuracy. Given that IRR is directly affected by the level of analyst forecast biass(=-=Easton and Sommers 2005-=-), it is potentially important to control for differential bias when westest H2. We thus include forecast bias as an additional control variable in our regressions. Finally,sfollowing Hail and Leuz (2...