Do Textual Similarity Necessarily Send Negative Signals? ——Evidence from Audit Pricing

Abstract: Existing studies generally believe that the modeling feature of management reports conveys "negative" signals such as risk avoidance and inaction of managers. However, this feature may conveys "positive" signals to the market of normal and sound operation of enterprises. Taking the pricing behavior of auditors, an important information intermediary in the capital market, as an entry point, we use the data of listed companies from 2010 to 2021 to empirically test that: the higher the degree of sample management report, the lower the audit pricing, because normal and sound operation reduces the audit investment and audit risk. The extended discussion suggests that (1) internal controls optimize the important mechanisms involved, (2) the findings can be supported by other audit behavior results, (3) the negative relationship is more pronounced in contexts with higher audit fees, weaker auditor industry expertise, and higher auditor independence, and (4) there is no evidence that sample reporting enhances shareholder demand for high-quality audits. This paper adds to the motivation for sample management reporting on the one hand, providing a new perspective on how capital market information users view corporate disclosure, and on the other hand, providing new evidence for the cost hypothesis of audit pricing.