Recent studies document that market participants react positively to the positive language sentiment or tone embedded in financial disclosures, and that investors' reactions to negative news are more muted with poor disclosure readability. However, while language sentiment and readability co-occur in practice, their joint effects remain largely unexplored. In an experiment with MBA students as participants, we investigate how the effect of language sentiment varies with readability and investor sophistication level. We find that language sentiment influences investors' judgments when readability is low, but not when readability is high. Specifically, when readability is low, disclosures couched in positive language lead to higher earnings judgments for less sophisticated investors, but lower earnings judgments for more sophisticated investors. These findings show that the main effects of readability and language sentiment documented in prior studies have boundary effects, and may reverse when both variables are jointly considered along with investor sophistication.

No abstract

We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization. Industry specialist auditors are more likely than nonspecialists to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find evidence that audit quality measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients increases with the level of non-audit services acquired from industry specialist auditors compared to nonspecialist auditors. [2005], Francis and Ke [2006]) by showing that the effects of non-audit services on audit quality are not readily apparent without also jointly accounting for the effects of auditor specialization.Regulators' concerns that the provision of non-audit services impairs auditor independence (Levitt [1998], SEC [2000) gave rise to several studies that examine whether the provision of non-audit services impairs audit quality. These studies report seemingly conflicting results depending on the proxy of audit quality used. For example, notwithstanding earlier evidence by Frankel, Johnson, and Nelson [2002], recent evidence indicates that provision of non-audit services is not associated with the incidence of higher discretionary accruals and the propensity to meet earnings benchmarks (Ashbaugh, Lafond, and Mayhew [2003], Chung and Kallapur [2003]). Similarly, there is no evidence of an association between the provision of non-audit services and a reduced proclivity to issue going-concern opinions for financially distressed firms (Defond, Raghunandan, and Subramanyam [2002]). Kinney, Palmrose, and Scholz [2004] examine restatements of previously issued financial statements and find either no or negative association between restatements and major classes of non-audit services, and a positive association only for a small class of unspecified non-audit services (comprising 4.6% of total fees in their sample). In contrast, Francis and Ke [2006] document that market response to quarterly earnings surprises is significantly lower for firms with higher (vs. lower) non-audit fees. Krishnan, Sami, and Zhang [2005] also find a negative association between non-audit fees and earnings response coefficients in each of the three quarters following the proxy statement public disclosure of fee information.We view higher discretionary accruals, greater (lower) propensity to meet (miss) earnings benchmarks, lower propensity to issue going-concern opinions, and higher incidence of restatements to be proxies for impairment of auditor independence in fact. Discretionary accruals are subject to more measurement error than the other measures (Dechow, Sloan, and Sweeney [1995], Defond, Raghunandan, and Subramanyam [2002], Kinney and Libby [2002]). The strength of stock market responses to earnings surprises due to non-audit fees proxies for the market's perceptions of auditor independence in appearance. G...

No abstract

In this paper, we present the results of an experiment that investigates the effects of two contextual features—the availability of authoritative guidance and the effectiveness of the client's audit committee—on auditors' perceived outcome of auditor-client negotiations concerning an audit adjustment that affects the client's ability to meet analysts' forecasts. Results show that auditors' perceived negotiation outcome is jointly influenced by authoritative guidance availability and audit committee effectiveness. Specifically, authoritative guidance availability has a greater effect on auditors' perceived negotiation outcome in the absence of an effective audit committee than in its presence. We also find that concessionary moves by the client increase auditors' propensity to concede to the client's preferred position.