3.2.1 Compliance with GAS in the sample
I first assess compliance with the respective standards. Results are summarized in Ta- ble 4. Notably, the number of firms complying with GAS 4 and GAS 14 is considerably low. Only one firm (1.23%) complies with GAS 4 and only nine firms (14.06%) out of 64 possible appliers comply with GAS 14. The number of GAS 14 compliers and non- compliers does not sum up to 81 because not every firm has foreign subsidiaries. Com- pared to GAS 2 and GAS 3, a clear difference in the willingness to comply with the
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more costly standards becomes apparent. Since the number of firms complying with GAS 4 and GAS 14 is too low and does not exhibit enough variation, performing re- gression analyses is not feasible. Hence I restrict my investigation to GAS 2 and GAS 3.
Table 4: GAS compliance (n=405; 81 distinct firms)
GAS 2 GAS 3 GAS 4 GAS 14 Year compliers non- plierscom- compliersnon- plierscom- compliersnon- pliers com- compliers non- plierscom-
2000 64 17 67 14 n.a. n.a. n.a. n.a.
2001 63 18 61 20 80 1 n.a. n.a.
2002 57 24 55 26 80 1 n.a. n.a.
2003 56 25 58 23 80 1 n.a. n.a.
2004 54 27 57 24 80 1 55 9
Σ 294 111 298 107 320 4 55 9
In the year 2000, 17 firms (20.99%) comply with GAS 2. At the end of 2004, the num- ber of compliant firms amounts to 27 (33.33%). Likewise, 14 firms (17.28%) comply with GAS 3 in the year 2000, while the number of compliant firms increases to 24 (29.63%) at the end of 2004. This positive trend indicates an increasing importance of GAS compliance within the sample. Yet, the circumstance that the positive trend is lim- ited to GAS 2 and GAS 3 indicates that the standards are differently accepted by the firms or that compliance with the standards is used to fulfill different purposes.
3.2.2 Main variables: Public exposure and compliance pressure
I capture public exposure by two measures since I am especially interested in the rela- tionship between a firm’s public exposure and compliance. First, I measure press cover- age. In doing so, I collect the number of articles related to a company from January 1 until December 31 of the respective year in the German press. I draw on the database LexisNexis to retrieve this data. Second, I capture public exposure by the number of produced hits of a search request on the search engine Google. In both cases, I use the
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same query string: a firm’s official name including the abbreviated legal form (i.e. AG, KGaA, SE). Including the abbreviated legal form prevents that the number of produced hits is inflated if the firm name has meanings that are used in another context. For ex- ample a search for Brilliant instead of Brilliant AG might also refer to the adjective bril- liant, places in the USA and Canada or to several other meanings.
In order to capture peer pressure, I draw on the pressure imposed by compliant compa- nies in the same industry. The variable accounts for all companies that comply with the considered GAS within the same industry as the considered company. Inclusion in an industry is measured by the SIC division structure. The calculation is as follows:
1 * i j i i j n GAS n AVGGAS GASPEER ,
where GASPEER is the peer pressure for the company j, AVGGAS is the average com- pliance with the considered standard in the industry i including the effect of the com- pany j under study and n is the number of companies in the industry i, GAS is an indica- tor variable which is 1 if the company j complies with the considered standard. GASPEER takes the value 0, if the number of companies in an industry is one or if no company complies with the respective standard in the industry. This approach accounts for the pressure induced by the considered company.
Finally, I measure whether compliance is associated with being audited by an audit firm that is a member of the ASCG. Because the BIG4 audit firms are all members of the ASCG, the dummy variable ASCGMEM is one if the audit firm is a member but not a BIG4 audit firm to avoid multicollinearity.
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3.2.3 Control variables
I include controls for size, growth opportunity, risk, financing needs, debt agency prob- lems, international operations, profitability, ownership concentration, complexity, list- ing status, auditor and industry into my analysis. A summary of the independent vari- ables including a description can be found in Table 5.
Table 5: Summary of independent variables
Variable Proxy for Description (Source)
MKTCAP Size Natural logarithm of a firm’s market capitalization (World-scope)
GOOGLE Public Exposure Natural logarithm of the number of produced hits of a search request on the search engine Google using a firm’s official name including legal form (www.google.de)
PRESS Public Exposure Natural logarithm of the number of articles found searching for a firm’s official name including legal form (LexisNexis) GAS2PEER Compliance Pressure Self-constructed variable measuring the degree of GAS 2 use in the industry GAS3PEER Compliance Pressure Self-constructed variable measuring the degree of GAS 3 use in the industry
ASCGMEM Compliance Pressure Indicator variable taking the value 1 if a company is audited by an audit firm that is a member of the ASCG but is not a BIG4 audit firm (hand-collected)
TQ Growth opportu-nity
Market value of the equity at the end of the year plus the dif- ference between the book value of assets and the book value of equity at the end of the year, divided by the book value of the assets at the end of the year (Worldscope)
BETA Risk Measure of risk capturing the relationship between the volatil-ity of the stock and the volatility of the market (Worldscope) FINANCE Financing needs Net cash flow from financing activities to total assets (World-scope) LEV Debt agency problems Total debt to total assets (Worldscope)
%FORSALES International operations Foreign sales to sales (Worldscope) ROA Profitability EBIT to averaged total assets (Worldscope)
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SEG Complexity Number of product segments (Worldscope)
LISTING Listing Status
Indicator variable taking the value 1 if a company is listed in one of the selection indices DAX, MDAX or SDAX of Deutsche Börse at December 31 of the considered year (Deutsche Börse)
FORLISTING Listing Status Indicator variable taking the value 1 if a firm has a foreign listing (Worldscope) BIG4 Auditor Indicator variable taking the value 1 if a company is audited by one of the BIG4 audit firms (hand-collected) Industry dum-
mies Industry Industry classification based on the SIC division structure (Worldscope)