Finance Internal Seminar: Sam Damsgaard Enemark, AU and Mads Markvart Kjær, AU

Presenter: Sam Damsgaard Enemark, AU

Title: Psychological Distress and Audit Quality: Sensitive Register-Based Evidence from Denmark

Abstract: We investigate whether auditors’ excessive workloads lead to psychological distress, and, in turn, impaired audit quality. Using a novel longitudinal register-based dataset comprising of 123,144 firm-year observations in Denmark from 2016 to 2020, we find that auditors, who experience excessive workloads, are more likely to receive treatment for psychological distress, such as redeeming prescriptions on medicine used to treat mental health issues, to experience psychologist consultations, and to undergo talking therapy with their general practitioner. In turn, we find that clients of signing auditors and audit team members, who receive treatment for psychological distress, are associated with larger discretionary accruals and greater likelihood of meeting and beating the zero-earnings benchmark by a small margin. In additional tests, we find that auditors employed at Big 4 audit firms are less likely to develop psychological distress as a response to excessive workloads compared to auditors employed at non-Big 4 audit firms. However, once psychologically distressed, Big 4 auditors are associated with greater audit quality impairment. Furthermore, we find that audit quality is more impaired if the auditor audits complex clients. Lastly, we find that audit quality is impaired up to three years prior to the signing auditor receives treatment and remains impaired after their termination of treatment. Our findings suggest that excessive workloads are likely to be a structural burden in the auditing industry, and highlight the consequences of excessive auditor workload on audit quality.

Presenter: Mads Markvart Kjær, AU

Title: When inflows of capital and information displace, are returns predictable?

Abstract: We present evidence that a time gap between information updates and capital inflows generates positive correlation between returns of the most recent information arrival period and the capital arrival period. We establish the hypothesis using a simple equilibrium model and test its implications test on the aggregated US stock market. We utilize the fact that institutional investors receive capital inflows around turn-of-the month, while most macroeconomic releases are placed mid-month. We confirm the model’s implications empirically and show that mid-month returns strongly predict beginning of the month returns, with a sizeable economic magnitude. The results also hold for Treasury bond returns, using firm-specific earnings announcement returns, and out-of-sample.

Organizers: Stefan Hirth and Anders Merrild Posselt