Green Transition and Information Verification Costs

Abstract

This paper examines whether and how the green transition affects the information verification costs of firms in high-polluting industries. By leveraging China’s Green Audit of Outgoing Officials (GAOO) policy and employing audit fees as a proxy for verification costs, we observe a significant reduction in these costs for high-polluting firms during the economic transition toward green practices. The decrease is stronger among firms located in regions with departing public officials and for firms with more green information to be verified. We identify two channels driving this trend: (1) Auditors rely on public information generated from intensified governmental efforts, thereby economizing on the private verification of green information (i.e., a substitution effect); (2) High-polluting firms improve their environmental performance, leading to diminished client risk and lower verification demand. Additional analyses show that reduced audit fees are not accompanied by a deterioration in audit quality. Overall, our study indicates that the green transition can reduce information verification costs of high-polluting firms.

For enquiries, please contact Ms. Heidi Lam at heidilam@cuhk.edu.hk.