Environmental Policy and Audit Pricing

Abstract

This paper examines the effect of environmental policy stringency on audit pricing. Exploiting the exogenous variation in environmental policies across 26 countries, we find that firms in countries with more stringent environmental policies incur lower audit fees. The inverse association is more pronounced in common law countries, in countries with a higher level of public enforcement of regulations, and in countries with more protection of investors. The lower audit fees are also more prominent for firms followed by more analysts and firms with larger institutional ownership. Furthermore, we find that firms in countries with strong regulations are better and more innovative at managing environmental risk, which implies that better environmental performance of the firms following stronger regulations could lower the business risks and thus, decrease audit fees. Overall, our findings suggest that compliant firms benefit from environmental policy stringency.

Keywords: Environmental Policy Stringency; Government Policy and Regulation; Environmental Risk; Audit Pricing

JEL Classification: K32; Q56; G38; M42