Estelle Yuan Sun

We examine whether and how redacted disclosure in material contracts is related to the cost of an audit. Prior studies document that redaction of mandatory disclosure affects firms’ operating performance, voluntary disclosure decisions, and various market outcomes due to increased information asymmetry. Auditors do not face this information constraint and can access redacted information with little effort, and thus should not be affected by the redacted disclosure. Our findings show that while redacted disclosure has limited impact on audit effort, auditors do charge higher fees for redacting firms as they perceive redacted disclosure as an indicator of potential business and litigation risk. We also find that the positive relation between redacted disclosure and audit fees is mitigated for firms with a more transparent information environment (i.e., larger firms, firms providing more voluntary disclosure, firms with large customers, and firms with higher institutional ownership). Overall, our results suggest that auditors become more cautious in response to clients’ nondisclosure choices from public filings.

Synopsis The research problem This paper provides a semisystematic review of the literature on climate-related financial risk, with particular emphasis on whether that risk is adequately priced by financial markets and the implications of that risk assessment for financial reporting. Motivation This paper was motivated by a strong perception that financial markets have become increasingly exposed to the perils of climate change, and a concern for whether the rapid expansion of the literature on this topic sufficiently addresses financial markets’ correct pricing of the uncertainties inherent in these perils. Our particular goals were to understand the expansion of this literature, identify the originating and influential works that may have spurred this expansion, and provide new directions for research. The research question Our paper reviews the research on whether climate-related financial risk is adequately priced by the financial markets. Target population We examined a comprehensive sample of articles on climate-related financial risk published in the Financial Times’ Top 50 (FT50) accounting, finance, management, and business ethics journals over three decades, ending in 2022. Our analysis of the evolution of knowledge on climate-related financial risk also includes studies in non-FT50 journals (prior works) that may have spurred subsequent work in FT50 journals; non-FT50 journals (derivative works) that are inspired by the studies in FT50 journals; and set of studies that are similar to those in FT50 journals in terms of the topic (similar works) published in an array of non-FT50 journals. Adopted methodology We conducted a semisystematic review of knowledge flow based on bibliographic coupling, cocitation, and direct citation. Analyses We reviewed FT50 articles to examine the topics, methods, samples, and results. We compared FT50 articles with non-FT50 articles to explore their respective number of publications and average citations over time. We also examined the extent to which the FT50 and non-FT50 journals included accounting papers and the extent to which the top 20 papers, based on their impact (defined as the number of times a paper was considered an influential work by the FT50 journal papers), included accounting papers. Findings Compared to non-FT50 journals, we find that FT50 journals largely ignored climate-related financial risk until about 2010, and that the average citation of an FT50 publication was lower than a non-FT50 publication until around 2017. The fraction of FT50 and non-FT50 accounting journals publishing on climate-related financial risk remained low across all years. Moreover, the top 20 studies, based on their impact, included very few accounting papers. Our review of the content of the FT50 studies identifies traits of the literature that limit its generalizability, namely, a heavy emphasis on samples of U.S. corporations and the extensive use of association tests to develop the findings. Our review of the literature on the pricing effects of climate-related financial risk suggests that financial markets only partially price this risk and that fundamental questions relevant to policy remain unanswered.

We examine the determinants of firms’ 10‐K disclosures on the threat of and exposure to wildfires. We match the location of wildfires in the United States to firms in the same county as the wildfire. We first establish that wildfire disclosure is far from widespread. On average, 6.1% of firms with wildfires in their headquarters county mention wildfire information in their 10‐Ks. Second, we find that the number of wildfire days in a company's headquarters county is a key determinant of wildfire disclosure. The sensitivity of wildfire disclosure to wildfire exposure has also increased in recent years, emanating mainly from firms having experienced wildfires impacting their past operations and in the western states and the utility and banking industries, and from those exhibiting a high level of tangible assets. Third, we find that wildfire exposure has no bearing on stock price, whereas more wildfire‐related disclosure lowers stock price.

This paper documents a differential role of R&D versus selling, general, and administrative expenses (SG&A) for real earnings management. The distinction of these two components is important because prior studies mostly examine their combined use, but firms could manipulate them differently given the differing valuation implications. Reduced SG&A is viewed positively by investors as evidence of cost reduction, while reduced R&D is viewed negatively by investors as such expenditures are critical signals of expected growth. I examine their use in the context of seasoned equity offerings (SEOs) as well as firms receiving accounting and auditing enforcement releases (AAERs). Although both groups face strong incentives to manage earnings upward by reducing expenses, I predict and find that firms will reduce SG&A but increase R&D. During the manipulation period, SEO and AAER firms exhibit lower discretionary SG&A and higher discretionary R&D, relative to control firms, and investors positively value low discretionary SG&A and high discretionary R&D. Overall, this study confirms the importance of distinguishing between R&D and SG&A in real earnings management contexts and suggests a complementary (substitutive) relation between cutting SG&A (R&D) and accruals management.

This study investigates the mispricing of market‐wide investor sentiment by exploring the relation between sentiment and investor expectations of future earnings. Prior research argues that sentiment‐driven mispricing should be most pronounced for hard‐to‐value firms, such as those reporting losses (Baker and Wurgler 2006). Using investor expectations of future earnings, we provide empirical results consistent with this behavioral finance theory. We predict and find that investors perceive losses to be more (less) persistent during periods of low (high) sentiment; that (in contrast) investors perceive profit persistence to be lower (higher) during periods of low (high) sentiment; and that the effects appear stronger for loss firms relative to profit firms. We also document predictable cross‐sectional variation within losses (with the mispricing mitigated for losses associated with activities expected to generate future benefits), R&D, growth, large negative special items, and severe financial distress. Overall, our results document a new and important channel—investor expectations of future earnings—to explain sentiment‐driven mispricing.

Purpose: This study examines the relation between voluntary corporate social responsibility (CSR) disclosure and the local religious norms of firms’ stakeholders. Little is known about how these local norms (measured at the county level) affect firms’ disclosure practices and firm value, especially voluntary disclosure on climate change and environmental and social responsibility. Design/methodology/approach: Poisson regression models test for a significant relation between firms’ voluntary CSR disclosure intensity and the local religious norms of firms’ stakeholders. Also, an event study tests whether the local religious norms affect investment returns. The data analyzed are extracted from the archive of CSRwire, a prominent news organization that distributes CSR news to investors and the public worldwide. Findings: The study finds that firms in high adherence (high churchgoer) locations disclose CSR activities less frequently, and firms in high affiliation (a high proportion of non-evangelical Christian churchgoers) locations disclose CSR activities more frequently. The study also finds that managers make firm-value-increasing CSR disclosure decisions that cater to the religious and social norms of the local community. Practical implications: The results imply that managers self-identify with the local religious norms of stakeholders and appropriately disclose less about CSR activities when religious adherence is high and when religious affiliation (the ratio of non-evangelicals to evangelical Christians) is low. The authors find this noteworthy because religious bodies often call for greater CSR involvement and disclosure. Yet, at the firm level, it would appear that local community religious norms also prevail, as it is shown that they significantly explain firms’ CSR disclosure behavior, implying that managers cater to local religious norms in their disclosure decisions. Social implications: The findings suggest that managers vary the timing and intensity of voluntary CSR disclosure consistent with stakeholders’ local religious and social norms and that it would be costly and inefficient if the firms were to expand CSR disclosure without considering the religious norms of their local community. Originality value: This is the first large-sample study to show that local religious norms affect CSR disclosure behavior. The study makes use of a unique and novel data set obtained exclusively from CSRwire.