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Journal of Business Ethics

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07.12.2018 | Original Paper

Local Gambling Norms and Audit Pricing

verfasst von: Jeffrey L. Callen, Xiaohua Fang

Erschienen in: Journal of Business Ethics | Ausgabe 1/2020

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Abstract

This study investigates whether local gambling norms are associated with audit pricing. Using a religion-based measure of local social gambling norms, we find strong evidence that public firms located in U.S. counties with more liberal gambling norms exhibit higher levels of audit fees. This result is consistent with our view that, as an important external risk factor, clients’ local gambling norms influence audit pricing decisions. Our findings are robust to a battery of sensitivity tests, including non-religion based measures of liberal gambling norms and a natural experiment.

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We do not include these additional controls in the main analysis because they reduce the sample size significantly.

Akerlof (1980) proposes a utility-maximization model that incorporates social sanctions imposed by loss of reputation from breaking custom to rationalize why social customs costly to the individual persist over time.

The evidence is not unanimous. Callen et al. (2011) do not find a relation between religiosity and earnings management in a cross-country study.

Chen et al. (2014) state that “a number of features of innovation make it unappealing for rational managers and investors. These factors include the long-term nature of research projects, the high likelihood of failure, and large information asymmetry between insiders and outside investors.”

Due to data restrictions, most empirical studies do not distinguish between the two effects—increased auditor effort and increased risk premium—with the notable exception of Bell, Landsman, and Shackelford (2001).

Firms headquartered in localities with more liberal gambling norms are also more likely to employ a larger percentage of people with higher propensity to take speculative risks, which indirectly increase firms’ risk-taking.

To control for potential outliers, we winsorize the top and bottom 1% for all variables in the regression. The regression results are quantitatively similar (untabulated) without winsorization.

https://www.opendatasoft.com/2016/11/13/2016-united-states-election-results-open-data/.

We control for this through year fixed-effects.

Since audit report lag is a count variable, we also estimated Poisson and Negative Binomial regressions. The results (untabulated) remain robust.

Because of the well-known biases in the coefficient estimates of a logistic regression that includes fixed-effects, we elected to estimate a linear probability model instead. Nevertheless, the results (untabulated) remain robust for a logistic regression without fixed-effects and for a logistic regression with year and industry fixed-effects.

We also controlled for Gompers, Ishii, and Metrick (2003)’s governance measure (G index), and the α₁ coefficient remains positive and significant at less than the 1% level.

As a further sensitivity test, we follow Hall et al. (2001, 2005) and use an alternative adjustment based on the average citation count of all patents applied for in the same year and in the same technology class. The results (untabulated) remain very similar.

We also included Altman’s Z-SCORE (Altman 1968) financial distress measure to control for firms’ excessive risk-taking behavior. The results (untabulated) remain very similar.

Based on Liu et al. (2014), we also look at the time-series survey data from the Gallup Corporation regarding social attitudes toward alcohol and tobacco consumption. The survey data are subject to similar concerns as gaming consumption and casino visitations, and are also likely to be a less direct measure of social gambling norms. The untabulated results show mixed evidence when we replace the CP ratio with survey data. Thus, we suggest that readers exercise caution when using the survey data related to social attitudes toward alcohol and tobacco consumption to proxy for social gambling norms.

Since our system is just identified with one instrumental variable, we cannot implement a formal test for the validity of the instrument, which requires the system to be over-identified. In fact, the exclusion restriction cannot be tested directly (Wooldridge 2006). However, with more than one instrument, over-identification tests for exclusion restriction are possible under the assumption that one of the instruments is valid.

An alternative but equivalent difference-in-differences approach includes main effects (i.e., treatment variable and post-event variable, respectively) and an interaction term (i.e., treatment variable * post-event variable). Since our regression model (2) controls for firm and year fixed-effects, the LEG variable here is in fact equivalent to the interaction term in the alternative model. For treatment firms, LEG is switched off in the years before legalization and switched on in the years of and after legalization.

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Titel: Local Gambling Norms and Audit Pricing
verfasst von: Jeffrey L. Callen
Xiaohua Fang
Publikationsdatum: 07.12.2018
Verlag: Springer Netherlands
Erschienen in: Journal of Business Ethics / Ausgabe 1/2020
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-018-4079-8

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