Three Essays in Corporate Disclosure and Auditing

Joon Ho Kong, Fordham University


This dissertation consists of three distinct essays examining corporate disclosure and auditing. In the first chapter, I question the importance of peer selections and aim to provide a different perspective on the financial statement comparability literature by revisiting previous literature. The second essay examines the impact of the CEO general ability on voluntary disclosure decisions. The final essay examines how democratic development affects the auditor’s pricing decisions based on international data. Chapter 1 questions the importance of peer selections and aims to provide a different perspective on the financial statement comparability (FSC) literature. By selecting peers based on product similarity (TNIC), compensation (CP), and search-based (SBP), this chapter aims to isolate economic similarity from accounting comparability. It shows that FSCs, based on two-digit SIC, TNIC, CP, and SBP, are statistically different from each other. Moreover, results from the existing literature are mixed across different classifications of peers. As an extension, when TNIC-, CP-, and SBP-based FSC are included in the horserace regression specification, I find the explanatory power of alternative-peer-based FSC subsumes that of SIC-based FSC. This chapter suggests that researchers should consider choosing relevant peers based on information users and focal firms. Chapter 2 investigates how CEO general ability is associated with voluntary disclosure decisions. Recent technological improvements have led to a shift in the type of CEOs firms hire. More than ever, firms are trying to hire CEOs with general ability (GA) skills. This comes at a cost since CEO general ability is associated with higher compensation (Custodio, Ferreira, and Matos (2013)). In this chapter, we examine whether CEO general ability is related to greater and more accurate earnings forecasts. General ability could help management incorporate data from various sources and areas to provide more accurate forecasts. Alternatively, it is possible that deep knowledge of the firm that specialists possess is more valuable to forecast future firm performance. Our results suggest that general ability is indeed associated with greater forecast accuracy. We find that general ability is associated with about an 11% greater management forecast accuracy, which is economically meaningful. We also confirm that shareholders interpret forecasts from generalist CEOs as more accurate. Our results are valuable to investors that are assessing the information content of CEOs and for boards of directors making the always important succession plans. Chapter 3 investigates how country-level institutions lower the audit risk. Using data for 54 countries from 1989 to 2017, we empirically show that democratic development has a significant negative effect on audit fees. We find that a one-standard-deviation increase in democracy decreases audit fees by 19.9% on average. Moreover, we find that the Big N premium decreases with democratization, and foreign auditors charge clients a higher premium to compensate for information asymmetry. We employ instrumental variables and unexpected regime changes as additional identification strategies. Overall, we show that democratization improves confidence in capital markets and reduces client-specific risks, which decreases audit fees.

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Recommended Citation

Kong, Joon Ho, "Three Essays in Corporate Disclosure and Auditing" (2022). ETD Collection for Fordham University. AAI29169586.