Narrative Disclosures, Firm Life Cycle, and Audit Fees

21 Pages Posted: 23 May 2020

See all articles by Mahmud Hossain

Mahmud Hossain

Iona College

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS

Santanu Mitra

Wayne State University - School of Business Administration

Feras Salama

American University of Sharjah

Date Written: November 2019

Abstract

This study examines the relationship between narrative disclosure properties in terms of readability, optimism, and ambiguity of annual reports and audit fees, and how the relationship changes across firms' various life‐cycle stages. Using 54,883 observations for the years from 2000 to 2016, we find that these textual disclosure properties have positive audit pricing consequences. We suggest that narrative disclosure properties play an important role in estimating audit risk, and thus in audit fees. We further posit that the audit fee consequences of these disclosure characteristics vary across different phases of a client firm's corporate life cycle. Though we observe that with a decrease in readability and an increase in optimism and ambiguity of disclosure language that audit fees increase in the introduction phase, a firm's entry to the growth phase moderates the influence of these narrative disclosure features on audit fees. However, the impact of these lexical features on audit fees increases as client firms switch (1) from the growth phase to the maturity phase and (2) from the maturity phase to the decline phase. Based on these findings, we argue that, when examining the audit fee implication for management's disclosure strategies, researchers should treat client firms as dynamic evolving entities.

Keywords: audit fees, firm life cycle, qualitative disclosure

Suggested Citation

Hossain, Mahmud and Hossain, Mahmud and Mitra, Santanu and Salama, Feras, Narrative Disclosures, Firm Life Cycle, and Audit Fees (November 2019). International Journal of Auditing, Vol. 23, Issue 3, pp. 403-423, 2019, Available at SSRN: https://ssrn.com/abstract=3602844 or http://dx.doi.org/10.1111/ijau.12169

Mahmud Hossain (Contact Author)

Iona College ( email )

715 North Avenue
New Rochelle, NY 10801
United States

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS ( email )

Department of Accounting and MIS
College of Industrial Management. KFUPM Box 5076
Dhahran, 31261
Saudi Arabia
+966 13 860 8496 (Phone)
+966 13 860 3489 (Fax)

HOME PAGE: http://www4.kfupm.edu.sa/cim/acct_mis.html

Santanu Mitra

Wayne State University - School of Business Administration ( email )

Detroit, MI 48202
United States
313 577 9908 (Phone)
313 577 2000 (Fax)

Feras Salama

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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