Do High-Quality Auditors Mitigate the Real Effects of Accounting Conservatism? Evidence from Europe

Do High-Quality Auditors Mitigate the Real Effects of Accounting Conservatism? 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Evidence from Europe Elaoud Assawer This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8466701/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This study examines how accounting conservatism and external audit quality jointly affect firms’ investment efficiency, with a particular focus on under-investment and over-investment behavior. It also investigates whether audit quality moderates the influence of conservative financial reporting on investment decisions. The analysis uses a panel dataset of 397 European listed companies from the STOXX Europe 600 index over the 2014–2023 period, covering nine sectors and 17 countries. Investment efficiency is measured following Biddle et al. ( 2009 ), while accounting conservatism is captured using the Khan and Watts ( 2009 ) C-Score. Panel regressions with industry, country, and year fixed effects are employed to test the hypotheses. The results indicate that accounting conservatism is negatively associated with investment efficiency and significantly increases under-investment by discouraging managers from undertaking positive-NPV projects, while its effect on over-investment is not statistically significant. Audit quality moderates this relationship by mitigating the adverse impact of conservatism on under-investment and enhancing overall investment efficiency. The findings highlight the governance role of external auditors in improving the reliability of conservative accounting and promoting more efficient capital allocation. This study contributes to the literature by integrating conservatism and audit quality into a unified framework of investment efficiency and provides new evidence from a European context on how external assurance interacts with accounting prudence to shape corporate investment decisions. accounting conservatism audit quality investment efficiency under-investment over-investment financial reporting agency theory European firms 1. Introduction A investors, regulators, and researchers. Prior studies suggest that conservatism is influenced by firm-specific characteristics such as size, leverage, profitability, ownership structure, and corporate governance mechanisms. Given its complexity and economic implications, accounting conservatism remains a central issue in financial reporting research. It affects how firms recognize economic losses and gains, influences managers’ incentives, and ultimately shapes corporate decision-making. Conservatism has been viewed as both a reflection of prudent financial reporting and a potential constraint on firms’ investment activities. While conservative accounting can limit managerial opportunism and enhance the reliability of financial information, it may also discourage managers from pursuing profitable projects when future gains are not immediately recognized. Consequently, the degree of accounting conservatism adopted by a firm can significantly affect its investment efficiency particularly the extent of over- and under-investment. Auditors play a crucial role in this context. Through their monitoring and assurance functions, auditors assess the credibility of financial statements and the risks of material misstatement, including those arising from aggressive accounting or tax-related practices. High-quality auditors are more likely to constrain opportunistic behavior and reduce information asymmetry between managers and investors, thereby improving investment decisions. Recent evidence (Bigus, & Georgiou, 2025 ) suggests that auditors also consider the tax environment and risk exposure when assessing client conservatism. Despite substantial research on conservatism and audit quality, limited attention has been paid to how accounting conservatism interacts with audit quality to influence investment efficiency. The existing literature primarily examines their individual effects, but the moderating role of conservatism in the audit–investment nexus remains underexplored. This study fills that gap by investigating whether accounting conservatism strengthens or weakens the relationship between audit quality and firms’ investment efficiency, with a particular focus on over- and under-investment behaviors. Using a large sample of European firms listed on the STOXX Europe 600 index over the period 2014–2023, we find that audit quality is positively associated with investment efficiency. More importantly, we provide evidence that conservatism moderates this relationship: high conservatism reinforces the disciplinary role of auditors by curbing managerial incentives to engage in inefficient investment practices. This research contributes to the literature in several ways. First, it extends prior studies on investment efficiency by highlighting the interactive effect of audit quality and accounting conservatism. Second, it enriches our understanding of how financial reporting quality and external assurance mechanisms jointly influence firms’ real economic decisions. Third, by integrating agency theory and information asymmetry perspectives, the study shows how conservative reporting mitigates opportunistic investment behavior. Finally, the findings have practical implications for regulators and policymakers concerned with improving investment efficiency and the transparency of financial reporting across European markets. The remainder of this paper is structured as follows: Section 2 reviews the literature and develops the hypotheses; Section 3 presents the research design; Section 4 outlines the empirical methodology; Section 5 discusses the findings; and Section 6 reports the robustness tests and concluding remarks. 2. Theoretical Background and Hypotheses Development 2.1 Audit Quality and Investment Efficiency Auditors play a central role in corporate governance by providing an independent opinion on financial statements and certifying compliance with generally accepted accounting principles (GAAP). Transparency in financial reporting is a key mechanism for reducing information asymmetry and mitigating agency conflicts, particularly in contexts where accounting conservatism is applied (Aidytya Hidayatulah, et al., 2025 ). The complexity and scale of auditing increase with firm size, making the presence of a competent, independent, and qualified auditor essential. Without effective monitoring, managers may exploit cash flows generated from accounting conservatism to pursue projects that maximize personal benefits rather than firm value. This behavior can lead to over-investment, where resources are allocated to negative NPV projects, and to under-investment, where managers avoid positive NPV projects perceived as risky due to information asymmetry. These effects are especially pronounced in countries with strong investor protection and a robust auditing environment, where high-quality audits can significantly constrain managerial opportunism (Du & Lai, 2018 ) . Recent empirical evidence suggests that auditors indirectly reduce firms’ incentives to engage in opportunistic reporting or earnings management (DeFond & Subramanyam, 1998 ; Aidytya Hidayatulah, et al., 2025 ). Large book-tax differences and conservative accounting measures act as warning signals, increasing the likelihood of detection by tax authorities and encouraging prudent managerial behavior. High-quality audits enhance the credibility and reliability of financial information, thereby reducing agency costs and enabling managers to make more informed, value-maximizing investment decisions (Du & Lai, 2018 ). From the perspective of agency theory, over-investment arises when managers pursue empire-building, reputation enhancement, or personal compensation at the expense of shareholders. Conversely, under-investment occurs when risk-averse managers refrain from undertaking profitable but uncertain projects due to perceived risks or fear of scrutiny. Auditors with strong reputations such as Big 4 firms or industry specialists are better equipped to detect earnings manipulation, constrain opportunistic behavior, and improve transparency. Consequently, high audit quality improves investment efficiency by reducing both over-investment and under-investment . By mitigating agency conflicts and enhancing the reliability of financial reporting, auditors help ensure that managers allocate capital to projects that maximize firm value, rather than personal gain or risk avoidance. H1 Audit quality is positively associated with firms’ investment efficiency. H1a Audit quality mitigates under-investment by reducing risk-averse behavior in managers. H1b Audit quality mitigates over-investment by constraining opportunistic managerial decisions and increasing transparency. 2.2 Accounting Conservatism and Investment Efficiency: Mechanisms Agency conflicts arise when managers’ interests diverge from those of shareholders. In this setting, accounting conservatism helps discipline managerial discretion by reducing opportunities for opportunistic behavior and mitigating agency problems. Accounting conservatism defined as the asymmetric recognition of losses relative to gains affects how firms report economic outcomes and evaluate investment opportunities (Basu, 1997 ; Bigus, & Georgiou, 2025 ). Conservative reporting ensures that potential losses are recognized promptly, constraining managers from engaging in overly optimistic or opportunistic investment behaviors (Kim, et al., 2003 ; Suleiman & Barnabas, 2021 ). However, excessive conservatism may also discourage managers from undertaking value-creating but risky projects, resulting in under-investment (Kravet, 2014 ). Tax-related conservatism, such as corporate tax avoidance, further illustrates the agency problem. While reducing tax payments can increase available cash flows for investment or shareholder payouts, it exposes the firm and managers to legal, reputational, and financial risks (Kim, et al., 2003 ). Risk-averse managers may avoid positive NPV projects if perceived as too risky or if shareholder preferences favor safer, lower-return initiatives, generating either over-investment or under-investment problems ( (Du & Lai, 2018 ). The imperfections in firms, including agency conflicts and information asymmetry, therefore hinder investment efficiency. Conservative accounting serves as a governance mechanism, potentially mitigating over-optimistic investments but also possibly discouraging optimal but risky projects. On the one hand, managers may invest excessively to increase their power, reputation, or compensation, beyond the optimal level for the company (Aidytya Hidayatulah, et al., 2025 ). By quickly recognizing potential losses and requiring prudent provisioning, conservative reporting reduces the perception of excessive project profitability. More conservative information alerts investors and auditors to real risks, forcing managers to limit excessive investment. Therefore, conservatism reduces overinvestment because it disciplines managerial decisions and increases financial transparency. On the other hand, managers, out of prudence or to avoid potential losses, may reject projects with a positive NPV but are risky, especially in environments where investors are risk-averse (Suleiman & Barnabas, 2021 ). Overly conservative reporting can amplify the perception of project risk and make future gains less visible. As a result, managers may focus on "safe" and short-term projects, for fear of incurring losses or exceeding forecasts, leading to suboptimal capital allocation. The expected effect is that conservatism can increase underinvestment if caution becomes excessive, limiting the company's ability to seize profitable opportunities. Based on these arguments, we hypothesize that accounting conservatism negatively affects overall investment efficiency, reducing over-investment (H2a) while potentially increasing under-investment (H2b). H2: Accounting conservatism is negatively related to overall investment efficiency. H2a: Accounting conservatism is negatively associated with over-investment. H2b: Accounting conservatism is positively associated with under-investment . 2.3 Moderating Role of Accounting Conservatism Accounting conservatism can influence the effectiveness of audit quality in improving investment efficiency. While high-quality audits constrain managerial opportunism and reduce information asymmetry, the degree of conservatism in financial reporting shapes the environment in which auditors operate. Conservative accounting ensures that losses are recognized promptly and that earnings are reported cautiously, providing auditors with a more accurate and risk-sensitive information set. This transparency allows auditors to detect potential misstatements or aggressive accounting practices more effectively, thereby enhancing their governance role. From an agency theory perspective, conservatism reduces managers’ discretion in financial reporting, which in turn strengthens the impact of high-quality auditing on managerial investment decisions (Kravet, 2014 ; Sonu, et al., 2017 ). In highly conservative firms, auditors can better assess the risks and returns of investment projects, preventing over-investment in negative NPV projects and encouraging under-invested opportunities with positive NPV. Conversely, in low-conservatism environments, financial statements may be less reliable, limiting auditors’ ability to monitor managerial behavior and weakening the positive effect of audit quality on investment efficiency (Givoly & Hayn, 2000 ; Kim, et al., 2003 ; Suleiman & Barnabas, 2021 ) Moreover, accounting conservatism interacts with audit quality to mitigate agency conflicts in both directions of investment inefficiency. Over-investment is curbed because conservative reporting highlights potential losses, alerting auditors and investors to projects that may be excessively risky or value-destroying. Under-investment is mitigated because conservative reporting provides clearer visibility on the economic value of profitable projects, allowing auditors to guide managers toward sound capital allocation even when managers are risk-averse. Empirical studies suggest that the combination of high audit quality and conservative reporting creates a disciplinary and informative environment that aligns managerial decisions with shareholder interests, reduces moral hazard, and improves overall investment efficiency (DeAngelo, 1981 ; Hwang, et al., 2013 ; Herda & Lavelle, 2022 ). In essence, accounting conservatism amplifies the positive effects of audit quality, making auditors more effective in curbing both over- and under-investment. Although both audit quality and conservatism independently affect investment efficiency, their interaction remains less explored. According to information asymmetry theory, conservatism can amplify the effectiveness of external auditing. By providing timely loss recognition and reducing information risk, conservative reporting enhances auditors’ ability to assess firm performance and detect misstatements ( (Francis, et al., 1999 ; Klein, 2002 ; Aidytya Hidayatulah, et al., 2025 ). In this sense, conservatism may strengthen the positive impact of audit quality on investment efficiency. When firms adopt conservative accounting policies, auditors’ monitoring becomes more effective, as financial information better reflects underlying risks and reduces the scope for opportunistic investment decisions. H3 Accounting conservatism positively moderates the relationship between audit quality and investment efficiency. Specifically, H3a Accounting conservatism strengthens the negative association between audit quality and over-investment. H3b Accounting conservatism strengthens the positive association between audit quality and under-investment. 3. Research Design and Methodology 3.1 Sample Selection This sample provides a balanced panel dataset that allows for robust analysis of the relationships between audit quality, accounting conservatism, and investment efficiency across a diverse set of European firms. Building on the hypotheses developed in the previous section, this part outlines the research design adopted to empirically test the proposed relationships among accounting conservatism, audit quality, and investment efficiency. It details the data collection process, the construction of the main variables, and the econometric specifications used for estimation. The study relies on a panel dataset of non-financial firms listed on the STOXX Europe 600 index over the period 2014–2023. The sample covers nine industries across 17 European countries, allowing for cross-country variation in institutional and regulatory environments. Financial institutions are excluded due to their distinct reporting standards and capital structure regulations. All financial data are obtained from Thomson Reuters Eikon (Datastream) and audit-related information from Audit Analytics and company annual reports. All variables are winsorized at the 1st and 99th percentiles to mitigate the influence of outliers. Continuous variables are standardized to enhance comparability across firms and countries. 3.2 Variables Measurement 3.2.1Dependent Variable: Investment Efficiency Investment efficiency is assessed following the accounting-based approach of Biddle et al. ( 2009 ), Gomariz and Ballesta ( 2014 ), and Elaoud and Jarboui ( 2017 ). Total investment is computed as the net increase in tangible and intangible assets, adjusted for asset disposals, and scaled by lagged total assets. Expected investment is estimated as a function of firms’ growth opportunities using the following model: Investmenti,t = β0 + β1SalesGrowthi,t − 1 + εi,t where SalesGrowth denotes the change in sales for firm i from t–2 to t–1 , and ε i ,ₜ represents the firm-specific deviation from predicted investment. This model is estimated separately for each industry-year to control for sectoral and temporal heterogeneity. The residuals ( ε i ,ₜ ) capture deviations from expected investment and serve as the proxy for investment efficiency: Positive residuals → Over-investment (actual investment above the optimal level); Negative residuals → Under-investment (actual investment below the optimal level). The absolute value of residuals indicates overall investment efficiency: smaller values imply that actual investment decisions are closer to optimal levels. Following Biddle et al. ( 2009 ) and Chen et al. ( 2011 ), two dependent variables are defined to capture asymmetric inefficiencies: OverI , for firms with positive residuals; UnderI , for firms with negative residuals. These two complementary specifications allow identifying the asymmetric influence of accounting conservatism and audit quality on investment inefficiency. 3.2.2 Independent Variable: Accounting Conservatism Accounting conservatism is evaluated using the C-Score model proposed by Khan and Watts ( 2009 ). This model measures firm-year differences in conditional conservatism that is, how promptly a company recognizes economic losses compared with gains based on its size, market-to-book ratio, and leverage. A higher C-Score indicates greater conditional conservatism. Because it adjusts for firm-specific factors, the C-Score has become one of the most accepted measures in empirical research (Kravet, 2014 ).The approach builds on Basu ( 1997 ), who defines accounting conservatism as the asymmetric recognition of bad versus good news in earnings. Basu’s basic specification is: Earningsi,t/Ai,t − 1 = α + β1RETi,t + β2(RETi,t×NEGi,t)+εi,t where RET is the annual return of firm i in year t , and NEG equals 1 when RET < 0 and 0 otherwise. A positive and significant β₂ implies a stronger degree of conditional conservatism. Khan and Watts ( 2009 ) expand Basu’s model by linking the timeliness of loss recognition to firm characteristics: Earningsi,t/Ai,t − 1 = α + β1RETi,t + β2(RETi,t×NEGi,t)+β3(RETi,t×SIZEi,t)+β4(RETi,t×MTBi,t)+β5(RETi,t×LEVi,t)+µi,t The firm-year C-Score is then computed as: C_Scorei,t=−(β2 + β3SIZEi,t + β4MTBi,t + β5LEVi,t) With higher scores reflecting stronger conditional conservatism. Here SIZE is the natural logarithm of total assets, MTB is the market-to-book ratio, and LEV is leverage (total debt / total assets). As a robustness check, the analysis also uses alternative measures: the Basu ( 1997 ) asymmetric-timeliness coefficient and the accrual-based conservatism proxy of Givoly and Hayn ( 2000 ). Employing multiple indicators reduces measurement bias and reinforces the reliability of the results. 3.2.3 Moderating Variable: Audit Quality Audit quality (AQ) acts as the moderating factor in this study. In line with prior auditing literature, the main proxy is a Big 4 indicator, coded 1 if the firm’s auditor is PwC, Deloitte, EY, or KPMG, and 0 otherwise. Big 4 auditors are generally associated with greater technical expertise, stronger independence, and more extensive resources, which enhance the credibility of financial reports (DeAngelo, 1981 ; Herda & Lavelle, 2022 ). Because audit quality is a multidimensional construct, two additional proxies, audit tenure and audit fees are employed for robustness testing. The main analysis relies on the Big 4 indicator as the primary measure of audit quality, while tenure and fees are used to validate the consistency and robustness of the results (Graschit & Steller, 2025 ). This multi-proxy framework follows evidence that no single measure fully captures audit quality (Lennox, et al., 2013 ). 3.2.4 Control Variables We include standard firm-level controls commonly used in investment efficiency research: Leverage (total debt/total assets), Tangibility (tangible/total assets), ROA (net income/total assets), and Firm Age (log of years since incorporation). All continuous variables are winsorized at the 1% and 99% levels. Table 1 (Appendix A) reports definitions and data sources for all variables. 3.3 Model Specification and Empirical Strategy This study empirically tests the proposed hypotheses using firm-level panel data. All models include firm-specific controls (leverage, tangibility, firm size, sales, and age) and fixed effects for year, industry, and country to account for unobserved heterogeneity. Variable definitions are presented in Table 1. The empirical analysis investigates the relationship between accounting conservatism (CONSER), audit quality (AQ), and investment efficiency (Effi). Building on prior research (Biddle et al., 2009 ; Lara et al., 2016), investment efficiency is modeled as a function of financial reporting quality and external monitoring mechanisms. To capture both direct and moderating effects, we estimate a series of baseline and extended models incorporating firm-level controls and fixed effects for year, industry, and country. Model 1 – Baseline Model Effii,t = β0 + β1CONSERi,t + β2AQi,t + β3Leveragei,t + β4Tangi,t + β5ROAi,t + β6LnAgei,t + β7Sizei,t + FE + εi,t where Effi represents investment efficiency, CONSERi,t measures conditional conservatism (C-Score), AQi,t denotes audit quality, FE refers to year, industry, and country fixed effects, and Xi,t′ represents the vector of control variables. This baseline model estimates the main effects of audit quality measured through three proxies: auditor fees, auditor rotation, and auditor reputation on investment efficiency, while capturing the direct influence of accounting conservatism on firms’ investment outcomes. To provide a more granular analysis, investment efficiency is further examined under two distinct scenarios: over-investment and under-investment. Model 2: Over-Investment Overi,t = β0 + β1CONSERi,t + β2AQi,t + Xi,t′γ + FE + εi,t Positive residuals from the investment model represent over-investment, where actual investment exceeds the level predicted by sales growth. Model 3 : Under-Investment Underi,t = β0 + β1CONSERi,t + β2AQi,t + Xi,t′γ + FE + εi,t Negative residuals indicate under-investment, where firms invest below expected levels, potentially reflecting managerial conservatism or financial constraints. By including year, industry, and country fixed effects, these models account for temporal, sectoral, and geographical heterogeneity that may influence investment behavior. All regressions are estimated using panel data techniques with robust standard errors clustered at the firm level to correct for heteroskedasticity and serial correlation. Model 4: Moderation Effect of Audit Quality Hypothesis H3 predicts that the negative impact of accounting conservatism on investment efficiency is mitigated in firms audited by high-quality auditors. Auditors with superior expertise and independence can better constrain opportunistic reporting and ensure that corporate resources are allocated efficiently. To test this moderating effect, we estimate the following interaction model: Effii,t = β0 + β1CONSERi,t + β2AQi,t + β3(CONSERi,t×AQi,t) + Xi,t′γ + FE + εi,t where CONSER×AQ captures whether audit quality strengthens or weakens the influence of accounting conservatism on firms’ investment efficiency. β1​ represents the marginal effect of conservatism when audit quality is at its mean level; β3 measures the moderating effect of audit quality on the conservatism–investment efficiency relationship. A positive and significant β3 suggests that high audit quality enhances the beneficial impact of conservatism by improving financial transparency and reducing information asymmetry. Conversely, a negative β3​ indicates that stringent auditing may amplify the restrictive side of conservatism, potentially increasing under-investment risk. To further disentangle the moderating effect across different investment contexts, we estimate two complementary models: Model 5 : Over-Investment: Overi,t = β0 + β1CONSERi,t + β2AQi,t + β3(CONSERi,t×AQi,t) + Xi,t′γ + FE + εi,t Model 6 : Under-Investment: Underi,t = β0 + β1CONSERi,t + β2AQi,t + β3(CONSERi,t×AQi,t) + Xi,t′γ + FE + εi,t These two models allow for a detailed examination of whether audit quality moderates the impact of conservatism differently across over- and under-investment situations. Potential endogeneity may arise from reverse causality or omitted variable bias. To strengthen causal inference, we employ two complementary estimation techniques. First, a dynamic panel model (System GMM) following Blundell and Bond (1998) is estimated to account for the persistence of investment efficiency and to address simultaneity issues. This approach uses lagged variables as internal instruments, ensuring consistency in the presence of endogenous regressors. Instrument validity is verified using the Hansen J-test and the Arellano–Bond AR(2) test for serial correlation. Second, as a robustness check, a Two-Stage Least Squares (2SLS) specification is implemented, where conservatism and audit quality are instrumented by exogenous institutional factors such as IFRS enforcement strength and audit market concentration. Standard diagnostic tests (first-stage F-statistic, Hansen test, and Durbin–Wu–Hausman test) confirm the reliability of the instruments. To summarize, addressing potential endogeneity through dynamic and instrumental-variable approaches enhances the reliability of the empirical estimates. Based on these methodological considerations, the expected signs of the main variables are as follows. Consistent with theoretical predictions, accounting conservatism (β₁) is expected to negatively affect investment efficiency by discouraging value-creating but risky projects. Conversely, audit quality (β₂) is expected to have a positive effect, reflecting its role in reducing information asymmetry. A positive and significant interaction term (β₃) would indicate that higher audit quality mitigates the adverse impact of conservatism, enhancing transparency and promoting efficient investment allocation. 4. Results and Discussions 4.1 Descriptive Statistics Table 1 presents the descriptive statistics for all variables used in the empirical analysis. “Table 1 about here” The mean value of investment efficiency (Effi) is − 0.119, indicating a moderate level of investment inefficiency among the sample firms. The average levels of under-investment (Underi = − 0.209) and over-investment (Overi = − 0.095) reveal that under-investment is more prevalent and stable, whereas over-investment exhibits higher dispersion, suggesting greater heterogeneity in firms’ expansion behavior. The mean accounting conservatism (CONSER) score is 0.076, with a wide range (− 1.78 to 2.91), reflecting substantial variation in conditional conservatism across firms and countries. This variation provides an appropriate setting to test the moderating role of conservatism in the relationship between audit quality and investment efficiency. Regarding control variables, firms exhibit an average leverage ratio of 0.298, a tangibility ratio of 0.399, and a mean return on assets (ROA) is 0.511. The average firm age (LnAge = 4.051) and size (LnAssets = 16.311) confirm that the sample consists primarily of large, mature, and well-established European listed firms. Concerning audit characteristics, approximately 60.6% of the firms are audited by Big 4 auditors (AQ = 1), whereas 39.1% are associated with non-Big 4 auditors (AQ = 0). The variable Audit Quality (AQ) is a binary indicator that takes the value of 1 for firms audited by Big 4 auditors and 0 otherwise. This distribution suggests that high-quality audits are relatively more prevalent in the sample, ensuring a balanced representation for the subsequent empirical analysis. Overall, the descriptive statistics are consistent with expectations from prior research, indicating that conservatism tends to coincide with lower levels of over-investment and higher levels of under-investment. The diversity observed across conservatism and audit quality measures enhances the robustness and generalizability of the forthcoming empirical analyses. 4.2 Correlation Matrix Table 2 displays the Pearson correlation coefficients among the study variables. Investment efficiency (Effi) is negatively correlated with accounting conservatism (CONSER) (r = − 0.201, p < 0.01), supporting the notion that excessive conservatism may constrain investment by delaying the recognition of favorable economic outcomes. In contrast, audit quality (AQ) is positively correlated with investment efficiency (r = 0.268, p < 0.01), consistent with the idea that high-quality auditors reduce agency conflicts and enhance information credibility, leading to more efficient capital allocation. A moderate and positive correlation is observed between CONSER and AQ (r = 0.142, p < 0.05), suggesting that firms audited by high-quality auditors tend to adopt more prudent reporting practices, as auditors promote timely loss recognition and discourage aggressive accounting choices. Among the control variables, firm size and sales growth show positive associations with investment efficiency, while leverage and tangibility are weakly negatively correlated. Importantly, all pairwise correlations are below 0.70, suggesting that multicollinearity is not a concern. “Table 2 about here” Overall, the descriptive and correlation analyses suggest that accounting conservatism and audit quality play opposite roles in shaping firms’ investment behavior. To test these relationships formally, we proceed with multivariate regression analyses in the next section. 4.3 Multivariate Analysis and Discussion of Results Table 3 presents the results of the multivariate regressions examining the effects of accounting conservatism (CONSER) and audit quality (AQ) on investment efficiency (Effi). Model (1) tests the direct effect of conservatism, Model (2) includes audit quality, and Model (3) introduces the interaction term between CONSER and AQ. The coefficient of CONSER is negative and significant (β = − 0.079, p < 0.01), supporting H1, which posits that higher conservatism is associated with lower investment efficiency. This finding is consistent with Khan and Watts ( 2009 ), who suggest that excessive conservatism may delay the recognition of positive economic outcomes and discourage firms from investing in value-creating projects. The coefficient of AQ is positive and significant (β = 0.063, p < 0.05), in line with H2, indicating that higher audit quality improves investment efficiency. This result reinforces the role of high-quality auditors, Big 4 industry specialists, in enhancing financial reporting credibility and mitigating agency conflicts, thereby facilitating more efficient capital allocation (Elaoud & Jarboui, 2017 ). Importantly, the interaction term CONSER × AQ in Model (3) is positive and statistically significant (β = 0.039, p < 0.05), confirming H3. This suggests that audit quality mitigates the negative impact of conservatism on investment efficiency. Firms audited by higher-quality auditors are better able to balance prudence with the need for accurate recognition of economic gains, thereby avoiding excessive under-investment linked to overly conservative reporting. Control variables generally display expected signs: firm size and sales growth are positively associated with investment efficiency, while leverage and asset tangibility are negatively associated. The inclusion of industry, year, and country fixed effects ensures that results are not driven by unobserved heterogeneity. The overall explanatory power of the models is satisfactory, with adjusted R² values ranging from 0.23 to 0.29, comparable to prior studies on investment efficiency (Chen, et al., 2011 ; Elaoud & Jarboui, 2017 ). “Table 3 about here” The results presented in Models (4) and (5) provide further insights into how accounting conservatism and audit quality jointly influence firms’ investment behavior. The empirical evidence reveals an asymmetric effect of conservatism on investment efficiency, consistent with its dual role in corporate decision-making. The regression results show that accounting conservatism has a positive and significant effect on under-investment (β = 0.079, p < 0.01). This finding indicates that excessive prudence may lead managers to reject value-creating projects when expected gains are uncertain or deferred. By requiring stronger verification before recognizing revenues or unrealized gains, conservative accounting raises the hurdle rate for investment approval. Although this cautious approach enhances reporting credibility, it can also discourage managers from undertaking projects with positive NPV but longer payback horizons. The interaction term between conservatism and audit quality (CONSER × AQ) is negative and significant (β = − 0.059, p < 0.05), suggesting that high-quality audits mitigate the restrictive effect of conservatism on investment. Independent and competent auditors—particularly those affiliated with Big 4 firms enhance the credibility of financial reporting, reassure investors, and reduce managerial uncertainty regarding performance evaluation. Consequently, external audit oversight helps restore managerial confidence in pursuing profitable investment opportunities, counterbalancing the under-investment effect of conservative reporting. In contrast, conservatism exhibits a negative but insignificant coefficient in the over-investment model (β = − 0.044, p > 0.10), implying that conservative reporting tends to constrain excessive or empire-building investments. By recognizing losses more promptly than gains, conservatism functions as an internal governance mechanism that disciplines managerial optimism and limits opportunistic spending. This result is consistent with agency theory, which posits that timely loss recognition reduces managerial discretion and protects shareholders’ interests by preventing inefficient capital allocation. The interaction between conservatism and audit quality in the over-investment model is positive and marginally significant (β = 0.050, p < 0.10). This finding indicates that audit quality reinforces the disciplining role of conservatism, although its marginal impact is weaker than in the under-investment case. In other words, conservative accounting and high audit quality act as complementary safeguards against over-investment, but their joint influence becomes less pronounced once managerial opportunism is already constrained. Overall, these results highlight the dual nature of accounting conservatism in shaping investment behavior. On one hand, conservatism strengthens governance and accountability by curbing excessive optimism and opportunistic investment, thereby reducing over-investment. On the other hand, it may unintentionally discourage efficient investment by imposing excessive caution and delaying gain recognition, thus contributing to under-investment. Audit quality emerges as a crucial moderating mechanism that reconciles these opposing effects. High-quality audits strengthen the informational environment, reduce agency costs, and restore managerial confidence in investment decisions. Specifically, auditors transform conservatism from a rigid reporting constraint into a governance-enhancing mechanism that promotes balanced and efficient investment behavior. “Table 4 about here” Overall, these findings contribute to the growing literature on financial reporting and corporate governance by demonstrating that the economic impact of conservatism depends critically on the quality of external monitoring. Effective audits can preserve the disciplinary benefits of conservatism while attenuating its potential inefficiency costs, thereby fostering optimal capital allocation and sustainable firm growth. 5. Robustness Analyses and Sensitivity Tests To ensure the reliability and robustness of the main findings, we conduct several additional analyses using alternative measurement approaches for the key variables—investment efficiency, audit quality, and accounting conservatism as well as complementary sensitivity checks. These analyses aim to confirm that the observed relationships are not driven by specific proxy choices or model assumptions. As a first robustness test, we re-estimate investment efficiency using the model proposed by Chen et al. ( 2011 ), which captures the asymmetric response of investment to changes in sales growth. The model is specified as follows: Investmenti,t = β0 + β1NEGi,t − 1 + β2SalesGrowthi,t − 1 + β3(NEGi,t − 1×SalesGrowthi,t − 1)+εi,t where Investment represents the net increase in tangible and intangible assets scaled by lagged total assets, SalesGrowth is the annual percentage change in sales, and NEG equals 1 if sales growth is negative, and 0 otherwise. This alternative measure accounts for nonlinearities in investment behavior. The results remain consistent with those of the baseline model, confirming that our main conclusions are not sensitive to the proxy used for investment efficiency. In the second robustness test, we re-examine audit quality (AQ) using two additional proxies commonly employed in the auditing literature. Re-estimating the baseline model with these alternative proxies yields similar coefficient signs and significance levels, confirming that the moderating role of audit quality on the conservatism–investment efficiency relationship is robust across different measures. Next, to verify the robustness of the conservatism proxy, we complement the Khan and Watts ( 2009 ) C-Score with two widely recognized alternatives: *Basu ( 1997 ) measure, based on the asymmetric timeliness of earnings in recognizing losses relative to gains, estimated at the firm-year level; and *Accrual-based measure (Givoly & Hayn, 2000 ), defined as the negative of total accruals scaled by lagged total assets, capturing unconditional conservatism. Results obtained from these alternative proxies confirm the stability of our findings. The relationship between conservatism and investment efficiency remains negative, while the interaction term between conservatism and audit quality remains positive and significant, reinforcing the moderating hypothesis. Finally, several complementary sensitivity tests were conducted to validate the overall robustness of the results: Alternative model specifications : random-effects and quantile regressions were estimated to explore potential distributional heterogeneity in investment behavior; Subsample analyses: regressions were re-estimated by industry and by investor protection level, producing consistent patterns; Lagged explanatory variables : one-year lags of conservatism and audit quality were introduced to mitigate simultaneity bias; Temporal robustness : models were re-estimated excluding the 2020–2021 COVID-19 period, with no material changes observed; and Multicollinearity diagnostics : Variance Inflation Factors (VIFs) below 3 across all specifications confirm the absence of multicollinearity concerns. Overall, these robustness and sensitivity analyses confirm the consistency and reliability of our main findings. Table 6 reports the robustness analyses conducted to verify whether the main findings remain consistent under alternative measurement approaches for the key variables investment efficiency, audit quality, and accounting conservatism. Specifically, Column (1) re-estimates investment efficiency using the Chen et al. ( 2011 ) specification. Column (2) replaces the baseline Big 4 proxy for audit quality with audit fees, while Column (3) substitutes the C-Score with the Basu ( 1997 ) measure of conservatism. Finally, Column (4) reports the results excluding the pandemic years (2020–2021) to assess temporal robustness. The dependent variable is investment efficiency (Effi). “Table 5 about here” The results in Table 5 confirm the robustness of our main findings. Across all alternative specifications, accounting conservatism (CONSER) maintains a negative and significant association with investment efficiency, suggesting that excessive prudence continues to constrain optimal investment decisions. Audit quality (AQ) remains positive and significant, indicating that firms audited by higher-quality auditors whether measured by Big 4 status or audit fees exhibit more efficient investment behavior. Most importantly, the interaction term (CONSER × AQ) consistently shows a positive and significant effect across all models, confirming that high audit quality mitigates the restrictive impact of conservatism. This reinforces the moderating hypothesis (H3), suggesting that effective audits enhance the informational credibility of conservative reporting and help balance managerial caution with efficient capital allocation. Finally, excluding the pandemic period (2020–2021) does not materially change the results, demonstrating temporal stability and robustness. Table 6a and Table 6b summarize the robustness results for over- and under-investment subsamples. “Table 6a about here” For over-investment, accounting conservatism (CONSER) remains negatively associated with excessive capital expenditures, indicating that conservative reporting disciplines managerial over-optimism and mitigates empire-building behavior. Audit quality exhibits a positive and significant effect, confirming its role in enhancing investment efficiency through better monitoring and information credibility. The interaction term ( CONSER × AQ ) remains positive and significant, suggesting that high-quality audits amplify the beneficial governance effect of conservatism. Table 6b presents the robustness results for firms experiencing under-investment behavior. This subsample analysis examines whether the main findings hold when firms invest below their expected optimal level. “Table 6b about here” The results in Table 6b reveal a positive and significant association between accounting conservatism (CONSER) and under-investment (β = 0.076, p < 0.01), suggesting that excessive prudence leads managers to reject potentially profitable projects due to delayed recognition of future gains. Audit quality (AQ) exhibits a positive coefficient (β = 0.061, p < 0.05), consistent with the notion that high-quality audits improve the reliability of financial reporting and encourage more optimal investment decisions. Importantly, the interaction term (CONSER × AQ) is negative and statistically significant (β = −0.048, p < 0.05), indicating that audit quality mitigates the adverse impact of conservatism on investment behavior. This finding supports the moderating hypothesis (H3), showing that strong external audits can offset the restrictive nature of conservative accounting and restore managerial confidence in pursuing positive NPV projects. Overall, these findings highlight that while conservatism may induce under-investment when applied excessively, its negative effects are reduced when firms engage high-quality auditors, reinforcing the complementary roles of accounting prudence and audit oversight. For under-investment, conservatism displays a positive and significant coefficient, supporting the view that excessive prudence constrains managerial flexibility and discourages risky but value-enhancing projects. However, the interaction term between conservatism and audit quality is negative and significant, implying that reputable auditors help alleviate this restrictive effect by improving investor confidence and reducing informational asymmetry. Overall, the robustness and sensitivity tests confirm the consistency of the main findings. Accounting conservatism exerts a dual influence on investment decisions: while it reduces over-investment by enforcing financial discipline, it may also induce under-investment when applied excessively. Audit quality moderates both effects enhancing conservatism’s disciplinary benefits while mitigating its restrictive side. From a theoretical standpoint, these findings extend the agency and conservatism literature by showing that the governance value of conservatism depends on audit quality. From a practical perspective, they suggest that firms should complement prudent accounting with high-quality external auditing to achieve optimal investment efficiency. Regulators and standard-setters should also recognize the synergistic effect between conservative reporting and strong audit practices in promoting efficient capital allocation and transparent financial markets. 6. Conclusion This study investigates how accounting conservatism and audit quality jointly influence firms’ investment efficiency, using a large panel of European listed companies from 2013 to 2023. The results show that accounting conservatism is negatively associated with investment efficiency, consistent with the notion that excessive prudence may delay the recognition of good news and discourage value-creating projects. However, this adverse effect is significantly mitigated when firms are audited by high-quality auditors, particularly those affiliated with Big 4 firms. This finding supports the moderating role of audit quality in transforming conservative reporting into a governance-enhancing mechanism that improves investment efficiency. The robustness analyses confirm these conclusions across multiple specifications and proxy definitions. Alternative measures of investment efficiency (Chen et al., 2011 ), conservatism (Basu, 1997 ; Givoly & Hayn, 2000 ), and audit quality (tenure, audit fees) yield consistent results. Subsample tests by industry and investor protection level, as well as temporal robustness excluding the 2020–2021 COVID-19 period, reinforce the validity of the findings. This paper contributes to the literature by integrating financial reporting conservatism and audit quality within a unified framework of investment efficiency. The evidence highlights that high audit quality enhances the informational role of conservative accounting, facilitating more efficient capital allocation. For policymakers and practitioners, these results underline the importance of promoting both transparent reporting and strong audit oversight as complementary mechanisms for improving investment decisions and sustaining market confidence. Future research could extend this framework by incorporating digital audit technologies, ESG disclosures, or cross-country institutional factors affecting the conservatism–efficiency nexus. Declarations Funding The author received no financial support for the research, authorship, and/or publication of this article. Conflict of interest The author declares that there is no conflict of interest. References Aidytya Hidayatulah A, Ratnawati V, Rusli S (2025) The Effect of Accounting Conservatism and Cost of Debt on Tax Avoidance with CSR as a Moderation Variable. Archives Bus Res 13(7):64–178 Basu S (1997) The conservatism principle and the asymmetric timeliness of earnings. J Account Econ 24(1):3–37 Biddle GC, Hilary G, Verdi RS (2009) How does financial reporting quality relate to investment efficiency? 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Descriptive Statistics Variables N of obs Mean Std. Dev. Min Max Effi 3970 -0.119 0.251 -5.699 -0.00009 Overi 878 -0.209 0.471 -5.699 -0.00009 Underi 3092 -0.095 0.117 -4.149 -0.0005 CONSER 3970 0.000 0.066 -0.718 0.811 Lev 3970 0.298 1.31 0 26.291 Tang 3970 0.399 0.239 -0.360 6.129 ROA 3970 0.511 0.001 0.307 0.611 LnAge 3970 4.051 0.858 0.689 6.698 Size 3970 16.311 1.544 10.388 20.712 Variables Modality Proportion AQ 0 1 0.606 0.391 Notes: This table reports descriptive statistics for the main variables used in the analysis.CONSER = accounting conservatism (C-Score), AQ = audit quality (Big 4 indicator), Lev = leverage (total debt / total assets), Tang = tangibility (fixed assets / total assets), ROA = return on assets, LnSales = natural logarithm of sales, LnAge = natural logarithm of firm age, Size = logarithm of total assets. Data are sourced from the Datastream database. Table II. Pearson Correlation Matrix Variables (1) (2) (3) (4) (5) (6) (7) (8) (1) Effi 1 (2)CONSR –0.201*** 1 (3) AQ 0.268*** 0.142** 1 (4) Lev –0.126** 0.063 –0.051 1 (5) Tang –0.094* 0.025 –0.077 0.241*** 1 (6) ROA 0.191*** 0.084* 0.148*** 0.129** 0.077 1 (7) LnAge –0.062 0.023 –0.043 0.068 0.060 0.172*** 1 (8) Size 0.221*** 0.145* 0.182*** 0.088* 0.059 0.416*** 0.131** 1 Notes: this table reports the Pearson correlation matrix and multicollinearity diagnostics for the main variables included in the analysis. CONSER denotes accounting conservatism (C-Score); AQ refers to audit quality (Big 4 indicator); Lev is leverage (total debt to total assets); Tang represents asset tangibility (fixed assets to total assets); ROA denotes return on assets; LnSales is the natural logarithm of sales; LnAge is the natural logarithm of firm age; and Size represents firm size, measured as the logarithm of total assets. Statistical significance levels are indicated as p < 0.10, p < 0.05, and p < 0.01 (two-tailed). Table III. Regression Results: Conservatism, Audit Quality, and Investment Efficiency Variables (1) Base Model (2) + Audit Quality (3)+ (Moderation) CONSER −0.079*** (−3.59) −0.076*** (−3.45) −0.072*** (−3.19) AQ(Audit Quality) — 0.063** (2.08) 0.061** (2.15) CONSER× AQ — — 0.039** (2.01) Leverage −0.046 (−1.31) −0.043 (−1.26) −0.044 (−1.28) Tangibility −0.059** (−2.03) −0.056** (−1.94) −0.054** (−1.89) ROA 0.041** (2.01) 0.039** (2.00) 0.037* (1.85) LnAge −0.019 (−0.84) −0.020 (−0.89) −0.021 (−0.89) Size 0.046** (2.01) 0.047** (2.05) 0.048** (2.07) Year Fixed Effects Yes Yes Yes Industry.Fixed Effects Yes Yes Yes Country.Fixed Effects Yes Yes Yes Adj. R² 0.23 0.25 0.29 Observations (N) 3970 3970 3970 Wald χ² 121.37*** 138.52*** 154.66*** Notes: This table reports the results of panel regressions examining the effect of accounting conservatism (CONSER) and audit quality (AQ) on investment efficiency (Effi). Model (1) presents the baseline estimation including control variables. Model (2) introduces audit quality, and Model (3) adds the interaction term (CONSER × AQ) to test the moderating effect of audit quality on the relationship between conservatism and investment efficiency. All regressions include firm-level control variables (Leverage, Tangibility, ROA, LnAge, and Size), as well as year, industry, and country fixed effects. Standard errors are clustered at the firm level to correct for autocorrelation and heteroskedasticity. Variable definitions are provided in Table 1. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively. Table IV. Regression Results: Under- and Over-Investment Models Variables (1) Base Model (2) + Audit Quality (3)+ (Moderation Under Over Under OVER Under OVER CONSER 0.049** (1.98) –0.058***(-3.11) 0.054** (2.06) –0.062**(-3.18) 0.058** (2.07) –0.064**(-.10) AQ — — 0.043* (1.87) 0.051** (2.18) 0.045* (1.87) 0.052** (2.19) CONSER × AQ — — — — −0.041**(−2.02) -0.064***(-.02) Leverage 0.026 (1.01) −0.035(−1.12) 0.027 (1.02) −0.035 (−1.11) 0.028 (1.02) −0.035 (−1.12) Tangibility 0.044** (1.98) −0.051**(−2.00) 0.047**(1.99) −0.052**(−2.00) 0.049** (1.99) −0.052** (−2.01) ROA −0.025* (−1.74) 0.033** (2.04) −0.030*(−1.76) 0.034** (2.04) −0.031* (−1.81) 0.034** (2.05) LnAge 0.018 (0.91) −0.018 (−0.81) 0.020 (0.92) −0.018 −0.80) 0.020 (0.93) −0.019 (−0.82) Size −0.034**(−2.00) 0.053** (2.03) −0.040**(−2.04) 0.054** (2.05) −0.042**(−2.04) 0.056** (2.04) Year FE Yes Yes Yes Yes Yes Yes Industry.FE Yes Yes Yes Yes Yes Yes Country.FE Yes Yes Yes Yes Yes Yes Adj. R² 0.23 0.23 0.25 0.21 0.29 0.21 Wald χ² 121.25*** 121.25*** 138.52*** 121.25*** 154.66*** 121.25*** Notes: This table presents the results of fixed-effects regressions examining the determinants of over- and under-investment. Dependent variables are OverI (column 1) and UnderI (column 2), defined as positive and negative residuals from the investment model, respectively. Standard errors (in parentheses) are clustered at the firm level. ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively. Table V. Robustness Analyses and Sensitivity Tests Variables (1)Alternative Investment Efficiency (2)Alternative Audit Quality (3)Alternative Conservatism (4)Excluding2020–2021(Pandemic Period) CONSER −0.069*** (−3.08) −0.073*** (−3.02) −0.070*** (−3.18) −0.072*** (−3.11) AQ 0.059** (2.04) 0.062** (2.16) 0.061** (2.14) 0.062** (2.09) CONSER × AQ 0.028* (1.89) 0.031** (2.04) 0.030** (2.07) 0.031** (1.98) Leverage −0.043 (−1.15) −0.046 (−1.29) −0.044 (−1.30) −0.044 (−1.32) Tangibility −0.051* (−1.78) −0.057* (−1.91) −0.052* (−1.88) −0.058* (−1.92) ROA 0.036* (1.77) 0.040* (1.87) 0.037* (1.81) 0.039* (1.88) LnAge −0.019 (−0.79) −0.024 (−0.90) −0.022 (−0.91) −0.020 (−0.91) Size 0.044** (1.98) 0.051** (2.08) 0.049** (2.11) 0.050** (2.09) Year / Yes Yes Yes Yes Industry / Yes Yes Yes Yes Country.FE Yes Yes Yes Yes Adj. R² 0.31 0.30 0.29 0.32 Notes: This table reports robustness tests of the relationship between accounting conservatism (CONSER), audit quality (AQ), and investment efficiency (Effi).Column (1) re-estimates investment efficiency using the asymmetric investment model of Chen et al. (2011) .Column (2) replaces the baseline Big 4 indicator of audit quality with an alternative proxy (audit fees or tenure).Column (3) replaces the Khan and Watts (2009) C-Score with an alternative conservatism measure (Basu, 1997, or Givoly & Hayn, 2000).Column (4) excludes the 2020–2021 pandemic years to test temporal stability.All regressions include year, industry, and country fixed effects.Robust t-statistics are reported in parentheses.*, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively. Table VIa . Robustness Tests – Over-Investment Subsample Variables (1)Alternative Over-invest (2)Alternative Audit Quality (3)Alternative Conservatism (4)Excluding 2020–2021 CONSER −0.060***(−3.12) −0.061***(−3.12) −0.060***(−3.12) −0.059***(−3.09) AQ 0.049** (2.17) 0.050** (2.18) 0.049** (2.19) 0.048** (2.17) CONSER× AQ 0.039** (2.02) 0.040** (2.01) 0.039** (2.00) 0.038** (1.98) Leverage −0.034 (−1.10) −0.035 (−1.13) −0.034 (−1.12) −0.033 (−1.09) Tangibility −0.049** (−2.00) −0.050** (−2.01) −0.050** (−1.98) −0.051** (−2.01) ROA 0.032** (2.03) 0.033** (2.02) 0.033** (2.03) 0.031** (2.01) LnAge −0.015 (−0.79) −0.015 (−0.81) −0.016 (−0.80) −0.014 (−0.80) Size 0.042** (2.02) 0.041** (2.06) 0.042** (2.03) 0.040** (1.99) Year / Yes Yes Yes Yes Industry / Yes Yes Yes Yes Country.FE Yes Yes Yes Yes Adj. R² 0.23 0.22 0.23 0.21 Notes: This table presents robustness tests for the subsample of firms classified as over-investors, i.e., firms exhibiting positive residuals from the investment model. The dependent variable (Overᵢ,ₜ) represents over-investment intensity. The results are consistent with the baseline regressions, showing that accounting conservatism is negatively related to over-investment, while higher audit quality mitigates this effect. All models control for firm-specific characteristics (Leverage, Tangibility, ROA, Age, Size, Sales) and include fixed effects by year, industry, and country. Standard errors are clustered at the firm level. ***, **, * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Table VIb . Robustness Tests – Under-Investment Subsample Variables (1)Alternative Under-Investment (2)Alternative Audit Quality (3)Alternative Conservatism (4)Excluding2020–2021 (Pandemic Period) CONSER 0.049** (2.01) 0.050** (2.05) 0.055** (2.06) 0.050** (2.05) AQ 0.039* (1.84) 0.041* (1.87) 0.044* (1.88) 0.042* (1.86) CONSER× AQ −0.038** (−2.01) −0.040**(−2.02) −0.042**(−2.04) −0.040** (−2.02) Leverage 0.026 (1.01) 0.027 (1.02) 0.027 (1.08) 0.026 (1.03) Tangibility 0.044** (1.97) 0.044** (1.98) 0.045** (1.98) 0.044** (1.97) ROA −0.028* (−1.64) −0.028* (−1.77) −0.029* (−1.76) −0.027* (−1.80) LnAge 0.019 (1.02) 0.019 (0.98) 0.021 (0.99) 0.020 (0.92) Size −0.041** (−1.98) −0.038** (−2.01) −0.038** (−2.00) −0.039** (−2.00) Year / Yes Yes Yes Yes Industry / Yes Yes Yes Yes Country.FE Yes Yes Yes Yes Adj. R² 0.27 0.27 0.28 0.27 Notes: This table presents robustness results for the under-investment subsample (firms with negative residuals from the investment model). The dependent variable (Underᵢ,ₜ) measures under-investment intensity. Results confirm that conservative reporting tends to exacerbate under-investment, but this adverse effect is attenuated in firms audited by high-quality auditors, consistent with the moderating hypothesis (H3). Control variables and fixed effects are included as in previous models. Clustered standard errors are reported at the firm level. ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively. Additional Declarations The authors declare no competing interests. Supplementary Files AppendixA.docx Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-8466701","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":566434495,"identity":"65b07902-b912-49cb-af05-98c36ec97da2","order_by":0,"name":"Elaoud Assawer","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA+UlEQVRIiWNgGAWjYDACdhDBBuNVQEQYGxjkcGthRtFyhoGBhxmsxZhILYxtRGjhZ2Z++JinzM5evv2M4ePKeTaJ+5mZDz6cwWCQj0uLZDObsTHPueTEDWdyjA3PbktL7GFmSzbcwGBg2YBDi8FhBjNp3jbmBAOG3G2SjdsOA7XwmEk+YPhjgMsW+8Ps34Ba6u3l+99u/9k4B67FAKcWA6ACoJbDjA03crcxNjZAtWzAo0XiME+x4ZxzxxM33Hj/WbLhWJpxz2GgX2YY4NbC396+8cGbsmqgw9ISPzbU2Mi2tzcffNhTgVsLTgeTqmEUjIJRMApGATIAADeHTzv8Eg4gAAAAAElFTkSuQmCC","orcid":"https://orcid.org/0000-0001-9868-0822","institution":"University of Sfax","correspondingAuthor":true,"prefix":"","firstName":"Elaoud","middleName":"","lastName":"Assawer","suffix":""}],"badges":[],"createdAt":"2025-12-28 15:46:43","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-8466701/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-8466701/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":99611522,"identity":"624deb28-b4c0-46fe-9a09-19d32cdb47c5","added_by":"auto","created_at":"2026-01-06 12:27:07","extension":"docx","order_by":0,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":80418,"visible":true,"origin":"","legend":"","description":"","filename":"PaperIJDGpreprint.docx","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/c339c2623cbca59fd4b9a20d.docx"},{"id":99611524,"identity":"08c69e93-c7d0-47bc-aab6-1cc435a055be","added_by":"auto","created_at":"2026-01-06 12:27:07","extension":"json","order_by":1,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":342,"visible":true,"origin":"","legend":"","description":"","filename":"rs8466701.json","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/ac1dbe09ec6eaf202be272ee.json"},{"id":99611526,"identity":"7d47d603-3f34-4e6d-94bc-f31e359c4239","added_by":"auto","created_at":"2026-01-06 12:27:07","extension":"xml","order_by":2,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":151506,"visible":true,"origin":"","legend":"","description":"","filename":"rs84667010enriched.xml","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/003510295a934abb5edc0a38.xml"},{"id":99611525,"identity":"7915d22f-5a83-4e8e-aec4-d33f879610fe","added_by":"auto","created_at":"2026-01-06 12:27:07","extension":"xml","order_by":3,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":150144,"visible":true,"origin":"","legend":"","description":"","filename":"rs84667010structuring.xml","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/4d8c7d43e6baff3b6a470a98.xml"},{"id":99794645,"identity":"d77f66fc-a9ca-4269-b938-a292a2f7e9e1","added_by":"auto","created_at":"2026-01-08 13:35:49","extension":"html","order_by":4,"title":"","display":"","copyAsset":false,"role":"acdc-reference","size":158166,"visible":true,"origin":"","legend":"","description":"","filename":"earlyproof.html","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/a0917a7a036e4fda7cd123e7.html"},{"id":99804205,"identity":"f4361a94-5cb3-4018-b90f-3e5e1e95540e","added_by":"auto","created_at":"2026-01-08 14:12:25","extension":"pdf","order_by":0,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1683136,"visible":true,"origin":"","legend":"","description":"","filename":"manuscript.pdf","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/117b6c96-360b-4c46-937d-09fd0778b51d.pdf"},{"id":99611521,"identity":"53ac4756-1766-41cd-9f2b-9e0fccc7caf9","added_by":"auto","created_at":"2026-01-06 12:27:07","extension":"docx","order_by":1,"title":"","display":"","copyAsset":false,"role":"supplement","size":18547,"visible":true,"origin":"","legend":"","description":"","filename":"AppendixA.docx","url":"https://assets-eu.researchsquare.com/files/rs-8466701/v1/4c52a26dd9cc6892f64cbb12.docx"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003e\u003cstrong\u003eDo High-Quality Auditors Mitigate the Real Effects of Accounting Conservatism? Evidence from Europe\u003c/strong\u003e\u003c/p\u003e","fulltext":[{"header":"1. Introduction","content":"\u003cp\u003eA investors, regulators, and researchers. Prior studies suggest that conservatism is influenced by firm-specific characteristics such as size, leverage, profitability, ownership structure, and corporate governance mechanisms. Given its complexity and economic implications, accounting conservatism remains a central issue in financial reporting research. It affects how firms recognize economic losses and gains, influences managers\u0026rsquo; incentives, and ultimately shapes corporate decision-making.\u003c/p\u003e \u003cp\u003eConservatism has been viewed as both a reflection of prudent financial reporting and a potential constraint on firms\u0026rsquo; investment activities. While conservative accounting can limit managerial opportunism and enhance the reliability of financial information, it may also discourage managers from pursuing profitable projects when future gains are not immediately recognized. Consequently, the degree of accounting conservatism adopted by a firm can significantly affect its investment efficiency particularly the extent of over- and under-investment.\u003c/p\u003e \u003cp\u003eAuditors play a crucial role in this context. Through their monitoring and assurance functions, auditors assess the credibility of financial statements and the risks of material misstatement, including those arising from aggressive accounting or tax-related practices. High-quality auditors are more likely to constrain opportunistic behavior and reduce information asymmetry between managers and investors, thereby improving investment decisions. Recent evidence (Bigus, \u0026amp; Georgiou, \u003cspan citationid=\"CR4\" class=\"CitationRef\"\u003e2025\u003c/span\u003e) suggests that auditors also consider the tax environment and risk exposure when assessing client conservatism.\u003c/p\u003e \u003cp\u003eDespite substantial research on conservatism and audit quality, limited attention has been paid to how accounting conservatism interacts with audit quality to influence investment efficiency. The existing literature primarily examines their individual effects, but the moderating role of conservatism in the audit\u0026ndash;investment nexus remains underexplored. This study fills that gap by investigating whether accounting conservatism strengthens or weakens the relationship between audit quality and firms\u0026rsquo; investment efficiency, with a particular focus on over- and under-investment behaviors.\u003c/p\u003e \u003cp\u003eUsing a large sample of European firms listed on the STOXX Europe 600 index over the period 2014\u0026ndash;2023, we find that audit quality is positively associated with investment efficiency. More importantly, we provide evidence that conservatism moderates this relationship: high conservatism reinforces the disciplinary role of auditors by curbing managerial incentives to engage in inefficient investment practices.\u003c/p\u003e \u003cp\u003eThis research contributes to the literature in several ways. First, it extends prior studies on investment efficiency by highlighting the interactive effect of audit quality and accounting conservatism. Second, it enriches our understanding of how financial reporting quality and external assurance mechanisms jointly influence firms\u0026rsquo; real economic decisions. Third, by integrating agency theory and information asymmetry perspectives, the study shows how conservative reporting mitigates opportunistic investment behavior. Finally, the findings have practical implications for regulators and policymakers concerned with improving investment efficiency and the transparency of financial reporting across European markets.\u003c/p\u003e \u003cp\u003eThe remainder of this paper is structured as follows: Section 2 reviews the literature and develops the hypotheses; Section 3 presents the research design; Section 4 outlines the empirical methodology; Section 5 discusses the findings; and Section 6 reports the robustness tests and concluding remarks.\u003c/p\u003e"},{"header":"2. Theoretical Background and Hypotheses Development","content":"\u003cdiv id=\"Sec3\" class=\"Section2\"\u003e \u003ch2\u003e2.1 Audit Quality and Investment Efficiency\u003c/h2\u003e \u003cp\u003eAuditors play a central role in corporate governance by providing an independent opinion on financial statements and certifying compliance with generally accepted accounting principles (GAAP). Transparency in financial reporting is a key mechanism for reducing information asymmetry and mitigating agency conflicts, particularly in contexts where accounting conservatism is applied (Aidytya Hidayatulah, et al., \u003cspan citationid=\"CR1\" class=\"CitationRef\"\u003e2025\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThe complexity and scale of auditing increase with firm size, making the presence of a competent, independent, and qualified auditor essential. Without effective monitoring, managers may exploit cash flows generated from accounting conservatism to pursue projects that maximize personal benefits rather than firm value. This behavior can lead to over-investment, where resources are allocated to negative NPV projects, and to under-investment, where managers avoid positive NPV projects perceived as risky due to information asymmetry. These effects are especially pronounced in countries with strong investor protection and a robust auditing environment, where high-quality audits can significantly constrain managerial opportunism (Du \u0026amp; Lai, \u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) .\u003c/p\u003e \u003cp\u003eRecent empirical evidence suggests that auditors indirectly reduce firms\u0026rsquo; incentives to\u003c/p\u003e \u003cp\u003eengage in opportunistic reporting or earnings management (DeFond \u0026amp; Subramanyam, \u003cspan citationid=\"CR7\" class=\"CitationRef\"\u003e1998\u003c/span\u003e; Aidytya Hidayatulah, et al., \u003cspan citationid=\"CR1\" class=\"CitationRef\"\u003e2025\u003c/span\u003e). Large book-tax differences and conservative accounting measures act as warning signals, increasing the likelihood of detection by tax authorities and encouraging prudent managerial behavior. High-quality audits enhance the credibility and reliability of financial information, thereby reducing agency costs and enabling managers to make more informed, value-maximizing investment decisions (Du \u0026amp; Lai, \u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2018\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eFrom the perspective of agency theory, over-investment arises when managers pursue empire-building, reputation enhancement, or personal compensation at the expense of shareholders. Conversely, under-investment occurs when risk-averse managers refrain from undertaking profitable but uncertain projects due to perceived risks or fear of scrutiny. Auditors with strong reputations such as Big 4 firms or industry specialists are better equipped to detect earnings manipulation, constrain opportunistic behavior, and improve transparency.\u003c/p\u003e \u003cp\u003eConsequently, high audit quality improves investment efficiency by \u003cb\u003ereducing both over-investment and under-investment\u003c/b\u003e. By mitigating agency conflicts and enhancing the reliability of financial reporting, auditors help ensure that managers allocate capital to projects that maximize firm value, rather than personal gain or risk avoidance.\u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH1\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAudit quality is positively associated with firms\u0026rsquo; investment efficiency.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH1a\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAudit quality mitigates under-investment by reducing risk-averse behavior in managers.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH1b\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAudit quality mitigates over-investment by constraining opportunistic managerial decisions and increasing transparency.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec4\" class=\"Section2\"\u003e \u003ch2\u003e2.2 Accounting Conservatism and Investment Efficiency: Mechanisms\u003c/h2\u003e \u003cp\u003eAgency conflicts arise when managers\u0026rsquo; interests diverge from those of shareholders. In this setting, accounting conservatism helps discipline managerial discretion by reducing opportunities for opportunistic behavior and mitigating agency problems. Accounting conservatism defined as the asymmetric recognition of losses relative to gains affects how firms report economic outcomes and evaluate investment opportunities (Basu, \u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e; Bigus, \u0026amp; Georgiou, \u003cspan citationid=\"CR4\" class=\"CitationRef\"\u003e2025\u003c/span\u003e). Conservative reporting ensures that potential losses are recognized promptly, constraining managers from engaging in overly optimistic or opportunistic investment behaviors (Kim, et al., \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e2003\u003c/span\u003e; Suleiman \u0026amp; Barnabas, \u003cspan citationid=\"CR22\" class=\"CitationRef\"\u003e2021\u003c/span\u003e). However, excessive conservatism may also discourage managers from undertaking value-creating but risky projects, resulting in under-investment (Kravet, \u003cspan citationid=\"CR19\" class=\"CitationRef\"\u003e2014\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eTax-related conservatism, such as corporate tax avoidance, further illustrates the agency problem. While reducing tax payments can increase available cash flows for investment or shareholder payouts, it exposes the firm and managers to legal, reputational, and financial risks (Kim, et al., \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e2003\u003c/span\u003e). Risk-averse managers may avoid positive NPV projects if perceived as too risky or if shareholder preferences favor safer, lower-return initiatives, generating either over-investment or under-investment problems ( (Du \u0026amp; Lai, \u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2018\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThe imperfections in firms, including agency conflicts and information asymmetry, therefore hinder investment efficiency. Conservative accounting serves as a governance mechanism, potentially mitigating over-optimistic investments but also possibly discouraging optimal but risky projects.\u003c/p\u003e \u003cp\u003eOn the one hand, managers may invest excessively to increase their power, reputation, or compensation, beyond the optimal level for the company (Aidytya Hidayatulah, et al., \u003cspan citationid=\"CR1\" class=\"CitationRef\"\u003e2025\u003c/span\u003e). By quickly recognizing potential losses and requiring prudent provisioning, conservative reporting reduces the perception of excessive project profitability. More conservative information alerts investors and auditors to real risks, forcing managers to limit excessive investment. Therefore, conservatism reduces overinvestment because it disciplines managerial decisions and increases financial transparency. On the other hand, managers, out of prudence or to avoid potential losses, may reject projects with a positive NPV but are risky, especially in environments where investors are risk-averse (Suleiman \u0026amp; Barnabas, \u003cspan citationid=\"CR22\" class=\"CitationRef\"\u003e2021\u003c/span\u003e). Overly conservative reporting can amplify the perception of project risk and make future gains less visible. As a result, managers may focus on \"safe\" and short-term projects, for fear of incurring losses or exceeding forecasts, leading to suboptimal capital allocation. The expected effect is that conservatism can increase underinvestment if caution becomes excessive, limiting the company's ability to seize profitable opportunities.\u003c/p\u003e \u003cp\u003eBased on these arguments, we hypothesize that accounting conservatism negatively affects overall investment efficiency, reducing over-investment (H2a) while potentially increasing under-investment (H2b).\u003c/p\u003e \u003cp\u003e \u003cem\u003eH2: Accounting conservatism is negatively related to overall investment efficiency.\u003c/em\u003e \u003c/p\u003e \u003cp\u003e \u003cem\u003eH2a: Accounting conservatism is negatively associated with over-investment.\u003c/em\u003e \u003c/p\u003e \u003cp\u003e \u003cem\u003eH2b: Accounting conservatism is positively associated with under-investment\u003c/em\u003e.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec5\" class=\"Section2\"\u003e \u003ch2\u003e2.3 Moderating Role of Accounting Conservatism\u003c/h2\u003e \u003cp\u003eAccounting conservatism can influence the effectiveness of audit quality in improving investment efficiency. While high-quality audits constrain managerial opportunism and reduce information asymmetry, the degree of conservatism in financial reporting shapes the environment in which auditors operate. Conservative accounting ensures that losses are recognized promptly and that earnings are reported cautiously, providing auditors with a more accurate and risk-sensitive information set. This transparency allows auditors to detect potential misstatements or aggressive accounting practices more effectively, thereby enhancing their governance role.\u003c/p\u003e \u003cp\u003eFrom an agency theory perspective, conservatism reduces managers\u0026rsquo; discretion in financial reporting, which in turn strengthens the impact of high-quality auditing on managerial investment decisions (Kravet, \u003cspan citationid=\"CR19\" class=\"CitationRef\"\u003e2014\u003c/span\u003e; Sonu, et al., \u003cspan citationid=\"CR21\" class=\"CitationRef\"\u003e2017\u003c/span\u003e). In highly conservative firms, auditors can better assess the risks and returns of investment projects, preventing over-investment in negative NPV projects and encouraging under-invested opportunities with positive NPV. Conversely, in low-conservatism environments, financial statements may be less reliable, limiting auditors\u0026rsquo; ability to monitor managerial behavior and weakening the positive effect of audit quality on investment efficiency (Givoly \u0026amp; Hayn, \u003cspan citationid=\"CR11\" class=\"CitationRef\"\u003e2000\u003c/span\u003e; Kim, et al., \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e2003\u003c/span\u003e; Suleiman \u0026amp; Barnabas, \u003cspan citationid=\"CR22\" class=\"CitationRef\"\u003e2021\u003c/span\u003e)\u003c/p\u003e \u003cp\u003eMoreover, accounting conservatism interacts with audit quality to mitigate agency conflicts in both directions of investment inefficiency. Over-investment is curbed because conservative reporting highlights potential losses, alerting auditors and investors to projects that may be excessively risky or value-destroying. Under-investment is mitigated because conservative reporting provides clearer visibility on the economic value of profitable projects, allowing auditors to guide managers toward sound capital allocation even when managers are risk-averse.\u003c/p\u003e \u003cp\u003eEmpirical studies suggest that the combination of high audit quality and conservative reporting creates a disciplinary and informative environment that aligns managerial decisions with shareholder interests, reduces moral hazard, and improves overall investment efficiency (DeAngelo, \u003cspan citationid=\"CR6\" class=\"CitationRef\"\u003e1981\u003c/span\u003e; Hwang, et al., \u003cspan citationid=\"CR15\" class=\"CitationRef\"\u003e2013\u003c/span\u003e; Herda \u0026amp; Lavelle, \u003cspan citationid=\"CR14\" class=\"CitationRef\"\u003e2022\u003c/span\u003e). In essence, accounting conservatism amplifies the positive effects of audit quality, making auditors more effective in curbing both over- and under-investment.\u003c/p\u003e \u003cp\u003eAlthough both audit quality and conservatism independently affect investment efficiency, their interaction remains less explored. According to information asymmetry theory, conservatism can amplify the effectiveness of external auditing. By providing timely loss recognition and reducing information risk, conservative reporting enhances auditors\u0026rsquo; ability to assess firm performance and detect misstatements ( (Francis, et al., \u003cspan citationid=\"CR10\" class=\"CitationRef\"\u003e1999\u003c/span\u003e; Klein, \u003cspan citationid=\"CR18\" class=\"CitationRef\"\u003e2002\u003c/span\u003e; Aidytya Hidayatulah, et al., \u003cspan citationid=\"CR1\" class=\"CitationRef\"\u003e2025\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eIn this sense, conservatism may strengthen the positive impact of audit quality on investment efficiency. When firms adopt conservative accounting policies, auditors\u0026rsquo; monitoring becomes more effective, as financial information better reflects underlying risks and reduces the scope for opportunistic investment decisions.\u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH3\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAccounting conservatism positively moderates the relationship between audit quality and investment efficiency.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003cp\u003eSpecifically,\u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH3a\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAccounting conservatism strengthens the negative association between audit quality and over-investment.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003cp\u003e \u003cstrong\u003eH3b\u003c/strong\u003e \u003cp\u003e \u003cem\u003eAccounting conservatism strengthens the positive association between audit quality and under-investment.\u003c/em\u003e \u003c/p\u003e \u003c/p\u003e \u003c/div\u003e"},{"header":"3. Research Design and Methodology","content":"\u003cdiv id=\"Sec7\" class=\"Section2\"\u003e \u003ch2\u003e\u003cem\u003e3.1\u003c/em\u003e Sample Selection\u003c/h2\u003e \u003cp\u003eThis sample provides a balanced panel dataset that allows for robust analysis of the relationships between audit quality, accounting conservatism, and investment efficiency across a diverse set of European firms.\u003c/p\u003e \u003cp\u003eBuilding on the hypotheses developed in the previous section, this part outlines the research design adopted to empirically test the proposed relationships among accounting conservatism, audit quality, and investment efficiency. It details the data collection process, the construction of the main variables, and the econometric specifications used for estimation.\u003c/p\u003e \u003cp\u003eThe study relies on a panel dataset of non-financial firms listed on the STOXX Europe 600 index over the period 2014\u0026ndash;2023. The sample covers nine industries across 17 European countries, allowing for cross-country variation in institutional and regulatory environments. Financial institutions are excluded due to their distinct reporting standards and capital structure regulations. All financial data are obtained from Thomson Reuters Eikon (Datastream) and audit-related information from Audit Analytics and company annual reports.\u003c/p\u003e \u003cp\u003eAll variables are winsorized at the 1st and 99th percentiles to mitigate the influence of outliers. Continuous variables are standardized to enhance comparability across firms and countries.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec8\" class=\"Section2\"\u003e \u003ch2\u003e3.2 Variables Measurement\u003c/h2\u003e \u003cdiv id=\"Sec9\" class=\"Section3\"\u003e \u003ch2\u003e3.2.1Dependent Variable: Investment Efficiency\u003c/h2\u003e \u003cp\u003eInvestment efficiency is assessed following the accounting-based approach of Biddle et al. (\u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e2009\u003c/span\u003e), Gomariz and Ballesta (\u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e2014\u003c/span\u003e), and Elaoud and Jarboui (\u003cspan citationid=\"CR9\" class=\"CitationRef\"\u003e2017\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eTotal investment is computed as the net increase in tangible and intangible assets, adjusted for asset disposals, and scaled by lagged total assets. Expected investment is estimated as a function of firms\u0026rsquo; growth opportunities using the following model:\u003c/p\u003e \u003cp\u003eInvestmenti,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1SalesGrowthi,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003ewhere SalesGrowth denotes the change in sales for firm \u003cem\u003ei\u003c/em\u003e from \u003cem\u003et\u0026ndash;2\u003c/em\u003e to \u003cem\u003et\u0026ndash;1\u003c/em\u003e, and \u003cb\u003eε\u003csub\u003ei\u003c/sub\u003e,ₜ\u003c/b\u003e represents the firm-specific deviation from predicted investment.\u003c/p\u003e \u003cp\u003eThis model is estimated separately for each industry-year to control for sectoral and temporal heterogeneity.\u003c/p\u003e \u003cp\u003eThe residuals (\u003cb\u003eε\u003csub\u003ei\u003c/sub\u003e,ₜ\u003c/b\u003e) capture deviations from expected investment and serve as the proxy for investment efficiency:\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003ePositive residuals\u003c/b\u003e \u0026rarr; \u003cem\u003eOver-investment\u003c/em\u003e (actual investment above the optimal level);\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eNegative residuals\u003c/b\u003e \u0026rarr; \u003cem\u003eUnder-investment\u003c/em\u003e (actual investment below the optimal level).\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eThe absolute value of residuals indicates overall investment efficiency: smaller values imply that actual investment decisions are closer to optimal levels.\u003c/p\u003e \u003cp\u003eFollowing Biddle et al. (\u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e2009\u003c/span\u003e) and Chen et al. (\u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2011\u003c/span\u003e), two dependent variables are defined to capture asymmetric inefficiencies:\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eOverI\u003c/b\u003e, for firms with positive residuals;\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eUnderI\u003c/b\u003e, for firms with negative residuals.\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eThese two complementary specifications allow identifying the asymmetric influence of accounting conservatism and audit quality on investment inefficiency.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec10\" class=\"Section3\"\u003e \u003ch2\u003e\u003cb\u003e3.2.2\u003c/b\u003e \u003cb\u003eIndependent Variable: Accounting Conservatism\u003c/b\u003e\u003c/h2\u003e \u003cp\u003eAccounting conservatism is evaluated using the C-Score model proposed by Khan and Watts (\u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2009\u003c/span\u003e). This model measures firm-year differences in \u003cem\u003econditional conservatism\u003c/em\u003e that is, how promptly a company recognizes economic losses compared with gains based on its size, market-to-book ratio, and leverage. A higher C-Score indicates greater conditional conservatism.\u003c/p\u003e \u003cp\u003eBecause it adjusts for firm-specific factors, the C-Score has become one of the most accepted measures in empirical research (Kravet, \u003cspan citationid=\"CR19\" class=\"CitationRef\"\u003e2014\u003c/span\u003e).The approach builds on Basu (\u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e), who defines accounting conservatism as the asymmetric recognition of bad versus good news in earnings.\u003c/p\u003e \u003cp\u003eBasu\u0026rsquo;s basic specification is:\u003c/p\u003e \u003cp\u003eEarningsi,t/Ai,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026thinsp;=\u0026thinsp;α\u0026thinsp;+\u0026thinsp;β1RETi,t\u0026thinsp;+\u0026thinsp;β2(RETi,t\u0026times;NEGi,t)+εi,t\u003c/p\u003e \u003cp\u003ewhere RET is the annual return of firm \u003cem\u003ei\u003c/em\u003e in year \u003cem\u003et\u003c/em\u003e, and NEG equals 1 when RET\u0026thinsp;\u0026lt;\u0026thinsp;0 and 0 otherwise.\u003c/p\u003e \u003cp\u003eA positive and significant β₂ implies a stronger degree of conditional conservatism. Khan and Watts (\u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2009\u003c/span\u003e) expand Basu\u0026rsquo;s model by linking the timeliness of loss recognition to firm characteristics:\u003c/p\u003e \u003cp\u003eEarningsi,t/Ai,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026thinsp;=\u0026thinsp;α\u0026thinsp;+\u0026thinsp;β1RETi,t\u0026thinsp;+\u0026thinsp;β2(RETi,t\u0026times;NEGi,t)+β3(RETi,t\u0026times;SIZEi,t)+β4(RETi,t\u0026times;MTBi,t)+β5(RETi,t\u0026times;LEVi,t)+\u0026micro;i,t\u003c/p\u003e \u003cp\u003eThe firm-year C-Score is then computed as:\u003c/p\u003e \u003cp\u003eC_Scorei,t=\u0026minus;(β2\u0026thinsp;+\u0026thinsp;β3SIZEi,t\u0026thinsp;+\u0026thinsp;β4MTBi,t\u0026thinsp;+\u0026thinsp;β5LEVi,t)\u003c/p\u003e \u003cp\u003eWith higher scores reflecting stronger conditional conservatism. Here SIZE is the natural logarithm of total assets, MTB is the market-to-book ratio, and LEV is leverage (total debt / total assets).\u003c/p\u003e \u003cp\u003eAs a robustness check, the analysis also uses alternative measures: the Basu (\u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e) asymmetric-timeliness coefficient and the accrual-based conservatism proxy of Givoly and Hayn (\u003cspan citationid=\"CR11\" class=\"CitationRef\"\u003e2000\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eEmploying multiple indicators reduces measurement bias and reinforces the reliability of the results.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec11\" class=\"Section3\"\u003e \u003ch2\u003e3.2.3 Moderating Variable: Audit Quality\u003c/h2\u003e \u003cp\u003eAudit quality (AQ) acts as the moderating factor in this study. In line with prior auditing literature, the main proxy is a Big 4 indicator, coded 1 if the firm\u0026rsquo;s auditor is PwC, Deloitte, EY, or KPMG, and 0 otherwise. Big 4 auditors are generally associated with greater technical expertise, stronger independence, and more extensive resources, which enhance the credibility of financial reports (DeAngelo, \u003cspan citationid=\"CR6\" class=\"CitationRef\"\u003e1981\u003c/span\u003e; Herda \u0026amp; Lavelle, \u003cspan citationid=\"CR14\" class=\"CitationRef\"\u003e2022\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eBecause audit quality is a multidimensional construct, two additional proxies, audit tenure and audit fees are employed for robustness testing. The main analysis relies on the Big 4 indicator as the primary measure of audit quality, while tenure and fees are used to validate the consistency and robustness of the results (Graschit \u0026amp; Steller, \u003cspan citationid=\"CR13\" class=\"CitationRef\"\u003e2025\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThis multi-proxy framework follows evidence that no single measure fully captures audit quality (Lennox, et al., \u003cspan citationid=\"CR20\" class=\"CitationRef\"\u003e2013\u003c/span\u003e).\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec12\" class=\"Section3\"\u003e \u003ch2\u003e3.2.4 Control Variables\u003c/h2\u003e \u003cp\u003eWe include standard firm-level controls commonly used in investment efficiency research: Leverage (total debt/total assets), Tangibility (tangible/total assets), ROA (net income/total assets), and Firm Age (log of years since incorporation). All continuous variables are winsorized at the 1% and 99% levels. Table\u0026nbsp;1 (Appendix A) reports definitions and data sources for all variables.\u003c/p\u003e \u003c/div\u003e \u003c/div\u003e \u003cdiv id=\"Sec13\" class=\"Section2\"\u003e \u003ch2\u003e3.3 Model Specification and Empirical Strategy\u003c/h2\u003e \u003cp\u003eThis study empirically tests the proposed hypotheses using firm-level panel data. All models include firm-specific controls (leverage, tangibility, firm size, sales, and age) and fixed effects for year, industry, and country to account for unobserved heterogeneity. Variable definitions are presented in Table\u0026nbsp;1.\u003c/p\u003e \u003cp\u003eThe empirical analysis investigates the relationship between accounting conservatism (CONSER), audit quality (AQ), and investment efficiency (Effi). Building on prior research (Biddle et al., \u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e2009\u003c/span\u003e; Lara et al., 2016), investment efficiency is modeled as a function of financial reporting quality and external monitoring mechanisms. To capture both direct and moderating effects, we estimate a series of baseline and extended models incorporating firm-level controls and fixed effects for year, industry, and country.\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 1 \u0026ndash; Baseline Model\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eEffii,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;β3Leveragei,t\u0026thinsp;+\u0026thinsp;β4Tangi,t\u0026thinsp;+\u0026thinsp;β5ROAi,t\u0026thinsp;+\u0026thinsp;β6LnAgei,t\u0026thinsp;+\u0026thinsp;β7Sizei,t\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003ewhere Effi represents investment efficiency, CONSERi,t measures conditional conservatism (C-Score), AQi,t denotes audit quality, FE refers to year, industry, and country fixed effects, and Xi,t\u0026prime; represents the vector of control variables.\u003c/p\u003e \u003cp\u003eThis baseline model estimates the main effects of audit quality measured through three proxies: auditor fees, auditor rotation, and auditor reputation on investment efficiency, while capturing the direct influence of accounting conservatism on firms\u0026rsquo; investment outcomes.\u003c/p\u003e \u003cp\u003eTo provide a more granular analysis, investment efficiency is further examined under two distinct scenarios: over-investment and under-investment.\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 2: Over-Investment\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eOveri,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;Xi,t\u0026prime;γ\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003ePositive residuals from the investment model represent over-investment, where actual investment exceeds the level predicted by sales growth.\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 3 : Under-Investment\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eUnderi,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;Xi,t\u0026prime;γ\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003eNegative residuals indicate under-investment, where firms invest below expected levels, potentially reflecting managerial conservatism or financial constraints.\u003c/p\u003e \u003cp\u003eBy including year, industry, and country fixed effects, these models account for temporal, sectoral, and geographical heterogeneity that may influence investment behavior. All regressions are estimated using panel data techniques with robust standard errors clustered at the firm level to correct for heteroskedasticity and serial correlation.\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 4: Moderation Effect of Audit Quality\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eHypothesis H3 predicts that the negative impact of accounting conservatism on investment efficiency is mitigated in firms audited by high-quality auditors. Auditors with superior expertise and independence can better constrain opportunistic reporting and ensure that corporate resources are allocated efficiently.\u003c/p\u003e \u003cp\u003eTo test this moderating effect, we estimate the following interaction model:\u003c/p\u003e \u003cp\u003eEffii,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;β3(CONSERi,t\u0026times;AQi,t)\u0026thinsp;+\u0026thinsp;Xi,t\u0026prime;γ\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003ewhere CONSER\u0026times;AQ captures whether audit quality strengthens or weakens the influence of accounting conservatism on firms\u0026rsquo; investment efficiency.\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eβ1​ represents the marginal effect of conservatism when audit quality is at its mean level;\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003eβ3 measures the moderating effect of audit quality on the conservatism\u0026ndash;investment efficiency relationship.\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eA positive and significant β3 suggests that high audit quality enhances the beneficial impact of conservatism by improving financial transparency and reducing information asymmetry.\u003c/p\u003e \u003cp\u003eConversely, a negative β3​ indicates that stringent auditing may amplify the restrictive side of conservatism, potentially increasing under-investment risk.\u003c/p\u003e \u003cp\u003eTo further disentangle the moderating effect across different investment contexts, we estimate two complementary models:\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 5 : Over-Investment:\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eOveri,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;β3(CONSERi,t\u0026times;AQi,t)\u0026thinsp;+\u0026thinsp;Xi,t\u0026prime;γ\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eModel 6 : Under-Investment:\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eUnderi,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1CONSERi,t\u0026thinsp;+\u0026thinsp;β2AQi,t\u0026thinsp;+\u0026thinsp;β3(CONSERi,t\u0026times;AQi,t)\u0026thinsp;+\u0026thinsp;Xi,t\u0026prime;γ\u0026thinsp;+\u0026thinsp;FE\u0026thinsp;+\u0026thinsp;εi,t\u003c/p\u003e \u003cp\u003eThese two models allow for a detailed examination of whether audit quality moderates the impact of conservatism differently across over- and under-investment situations.\u003c/p\u003e \u003cp\u003ePotential endogeneity may arise from reverse causality or omitted variable bias. To strengthen causal inference, we employ two complementary estimation techniques.\u003c/p\u003e \u003cp\u003eFirst, a dynamic panel model (System GMM) following Blundell and Bond (1998) is estimated to account for the persistence of investment efficiency and to address simultaneity issues. This approach uses lagged variables as internal instruments, ensuring consistency in the presence of endogenous regressors. Instrument validity is verified using the Hansen J-test and the Arellano\u0026ndash;Bond AR(2) test for serial correlation.\u003c/p\u003e \u003cp\u003eSecond, as a robustness check, a Two-Stage Least Squares (2SLS) specification is implemented, where conservatism and audit quality are instrumented by exogenous institutional factors such as IFRS enforcement strength and audit market concentration. Standard diagnostic tests (first-stage F-statistic, Hansen test, and Durbin\u0026ndash;Wu\u0026ndash;Hausman test) confirm the reliability of the instruments.\u003c/p\u003e \u003cp\u003eTo summarize, addressing potential endogeneity through dynamic and instrumental-variable approaches enhances the reliability of the empirical estimates. Based on these methodological considerations, the expected signs of the main variables are as follows.\u003c/p\u003e \u003cp\u003eConsistent with theoretical predictions, accounting conservatism (β₁) is expected to negatively affect investment efficiency by discouraging value-creating but risky projects. Conversely, audit quality (β₂) is expected to have a positive effect, reflecting its role in reducing information asymmetry. A positive and significant interaction term (β₃) would indicate that higher audit quality mitigates the adverse impact of conservatism, enhancing transparency and promoting efficient investment allocation.\u003c/p\u003e \u003c/div\u003e"},{"header":"4. Results and Discussions","content":"\u003cdiv id=\"Sec15\" class=\"Section2\"\u003e \u003ch2\u003e4.1 Descriptive Statistics\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;1 presents the descriptive statistics for all variables used in the empirical analysis.\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;1 about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eThe mean value of investment efficiency (Effi) is \u0026minus;\u0026thinsp;0.119, indicating a moderate level of investment inefficiency among the sample firms. The average levels of under-investment (Underi\u0026thinsp;=\u0026thinsp;\u0026minus;\u0026thinsp;0.209) and over-investment (Overi\u0026thinsp;=\u0026thinsp;\u0026minus;\u0026thinsp;0.095) reveal that under-investment is more prevalent and stable, whereas over-investment exhibits higher dispersion, suggesting greater heterogeneity in firms\u0026rsquo; expansion behavior.\u003c/p\u003e \u003cp\u003eThe mean accounting conservatism (CONSER) score is 0.076, with a wide range (\u0026minus;\u0026thinsp;1.78 to 2.91), reflecting substantial variation in conditional conservatism across firms and countries. This variation provides an appropriate setting to test the moderating role of conservatism in the relationship between audit quality and investment efficiency.\u003c/p\u003e \u003cp\u003eRegarding control variables, firms exhibit an average leverage ratio of 0.298, a tangibility ratio of 0.399, and a mean return on assets (ROA) is 0.511. The average firm age (LnAge\u0026thinsp;=\u0026thinsp;4.051) and size (LnAssets\u0026thinsp;=\u0026thinsp;16.311) confirm that the sample consists primarily of large, mature, and well-established European listed firms.\u003c/p\u003e \u003cp\u003eConcerning audit characteristics, approximately 60.6% of the firms are audited by Big 4 auditors (AQ\u0026thinsp;=\u0026thinsp;1), whereas 39.1% are associated with non-Big 4 auditors (AQ\u0026thinsp;=\u0026thinsp;0). The variable Audit Quality (AQ) is a binary indicator that takes the value of 1 for firms audited by Big 4 auditors and 0 otherwise. This distribution suggests that high-quality audits are relatively more prevalent in the sample, ensuring a balanced representation for the subsequent empirical analysis.\u003c/p\u003e \u003cp\u003eOverall, the descriptive statistics are consistent with expectations from prior research, indicating that conservatism tends to coincide with lower levels of over-investment and higher levels of under-investment. The diversity observed across conservatism and audit quality measures enhances the robustness and generalizability of the forthcoming empirical analyses.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec16\" class=\"Section2\"\u003e \u003ch2\u003e\u003cem\u003e4.2\u003c/em\u003e Correlation Matrix\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;2 displays the Pearson correlation coefficients among the study variables. Investment efficiency (Effi) is negatively correlated with accounting conservatism (CONSER) (r = \u0026minus;\u0026thinsp;0.201, p\u0026thinsp;\u0026lt;\u0026thinsp;0.01), supporting the notion that excessive conservatism may constrain investment by delaying the recognition of favorable economic outcomes. In contrast, audit quality (AQ) is positively correlated with investment efficiency (r\u0026thinsp;=\u0026thinsp;0.268, p\u0026thinsp;\u0026lt;\u0026thinsp;0.01), consistent with the idea that high-quality auditors reduce agency conflicts and enhance information credibility, leading to more efficient capital allocation.\u003c/p\u003e \u003cp\u003eA moderate and positive correlation is observed between CONSER and AQ (r\u0026thinsp;=\u0026thinsp;0.142, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), suggesting that firms audited by high-quality auditors tend to adopt more prudent reporting practices, as auditors promote timely loss recognition and discourage aggressive accounting choices.\u003c/p\u003e \u003cp\u003eAmong the control variables, firm size and sales growth show positive associations with investment efficiency, while leverage and tangibility are weakly negatively correlated. Importantly, all pairwise correlations are below 0.70, suggesting that multicollinearity is not a concern.\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;2 about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eOverall, the descriptive and correlation analyses suggest that accounting conservatism and audit quality play opposite roles in shaping firms\u0026rsquo; investment behavior. To test these relationships formally, we proceed with multivariate regression analyses in the next section.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec17\" class=\"Section2\"\u003e \u003ch2\u003e\u003cem\u003e4.3\u003c/em\u003e Multivariate Analysis and Discussion of Results\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;3 presents the results of the multivariate regressions examining the effects of accounting conservatism (CONSER) and audit quality (AQ) on investment efficiency (Effi). Model (1) tests the direct effect of conservatism, Model (2) includes audit quality, and Model (3) introduces the interaction term between CONSER and AQ.\u003c/p\u003e \u003cp\u003eThe coefficient of CONSER is negative and significant (β = \u0026minus;\u0026thinsp;0.079, p\u0026thinsp;\u0026lt;\u0026thinsp;0.01), supporting H1, which posits that higher conservatism is associated with lower investment efficiency. This finding is consistent with Khan and Watts (\u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2009\u003c/span\u003e), who suggest that excessive conservatism may delay the recognition of positive economic outcomes and discourage firms from investing in value-creating projects.\u003c/p\u003e \u003cp\u003eThe coefficient of AQ is positive and significant (β\u0026thinsp;=\u0026thinsp;0.063, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), in line with H2, indicating that higher audit quality improves investment efficiency. This result reinforces the role of high-quality auditors, Big 4 industry specialists, in enhancing financial reporting credibility and mitigating agency conflicts, thereby facilitating more efficient capital allocation (Elaoud \u0026amp; Jarboui, \u003cspan citationid=\"CR9\" class=\"CitationRef\"\u003e2017\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eImportantly, the interaction term CONSER \u0026times; AQ in Model (3) is positive and statistically significant (β\u0026thinsp;=\u0026thinsp;0.039, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), confirming H3. This suggests that audit quality mitigates the negative impact of conservatism on investment efficiency. Firms audited by higher-quality auditors are better able to balance prudence with the need for accurate recognition of economic gains, thereby avoiding excessive under-investment linked to overly conservative reporting.\u003c/p\u003e \u003cp\u003eControl variables generally display expected signs: firm size and sales growth are positively associated with investment efficiency, while leverage and asset tangibility are negatively associated. The inclusion of industry, year, and country fixed effects ensures that results are not driven by unobserved heterogeneity.\u003c/p\u003e \u003cp\u003eThe overall explanatory power of the models is satisfactory, with adjusted R\u0026sup2; values ranging from 0.23 to 0.29, comparable to prior studies on investment efficiency (Chen, et al., \u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2011\u003c/span\u003e; Elaoud \u0026amp; Jarboui, \u003cspan citationid=\"CR9\" class=\"CitationRef\"\u003e2017\u003c/span\u003e).\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;3 about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eThe results presented in Models (4) and (5) provide further insights into how accounting conservatism and audit quality jointly influence firms\u0026rsquo; investment behavior. The empirical evidence reveals an asymmetric effect of conservatism on investment efficiency, consistent with its dual role in corporate decision-making.\u003c/p\u003e \u003cp\u003eThe regression results show that accounting conservatism has a positive and significant effect on under-investment (β\u0026thinsp;=\u0026thinsp;0.079, p\u0026thinsp;\u0026lt;\u0026thinsp;0.01). This finding indicates that excessive prudence may lead managers to reject value-creating projects when expected gains are uncertain or deferred. By requiring stronger verification before recognizing revenues or unrealized gains, conservative accounting raises the hurdle rate for investment approval. Although this cautious approach enhances reporting credibility, it can also discourage managers from undertaking projects with positive NPV but longer payback horizons.\u003c/p\u003e \u003cp\u003eThe interaction term between conservatism and audit quality (CONSER \u0026times; AQ) is negative and significant (β = \u0026minus;\u0026thinsp;0.059, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), suggesting that high-quality audits mitigate the restrictive effect of conservatism on investment. Independent and competent auditors\u0026mdash;particularly those affiliated with Big 4 firms enhance the credibility of financial reporting, reassure investors, and reduce managerial uncertainty regarding performance evaluation. Consequently, external audit oversight helps restore managerial confidence in pursuing profitable investment opportunities, counterbalancing the under-investment effect of conservative reporting.\u003c/p\u003e \u003cp\u003eIn contrast, conservatism exhibits a negative but insignificant coefficient in the over-investment model (β = \u0026minus;\u0026thinsp;0.044, p\u0026thinsp;\u0026gt;\u0026thinsp;0.10), implying that conservative reporting tends to constrain excessive or empire-building investments. By recognizing losses more promptly than gains, conservatism functions as an internal governance mechanism that disciplines managerial optimism and limits opportunistic spending. This result is consistent with agency theory, which posits that timely loss recognition reduces managerial discretion and protects shareholders\u0026rsquo; interests by preventing inefficient capital allocation.\u003c/p\u003e \u003cp\u003eThe interaction between conservatism and audit quality in the over-investment model is positive and marginally significant (β\u0026thinsp;=\u0026thinsp;0.050, p\u0026thinsp;\u0026lt;\u0026thinsp;0.10). This finding indicates that audit quality reinforces the disciplining role of conservatism, although its marginal impact is weaker than in the under-investment case. In other words, conservative accounting and high audit quality act as complementary safeguards against over-investment, but their joint influence becomes less pronounced once managerial opportunism is already constrained.\u003c/p\u003e \u003cp\u003eOverall, these results highlight the dual nature of accounting conservatism in shaping investment behavior. On one hand, conservatism strengthens governance and accountability by curbing excessive optimism and opportunistic investment, thereby reducing over-investment. On the other hand, it may unintentionally discourage efficient investment by imposing excessive caution and delaying gain recognition, thus contributing to under-investment.\u003c/p\u003e \u003cp\u003eAudit quality emerges as a crucial moderating mechanism that reconciles these opposing effects. High-quality audits strengthen the informational environment, reduce agency costs, and restore managerial confidence in investment decisions. Specifically, auditors transform conservatism from a rigid reporting constraint into a governance-enhancing mechanism that promotes balanced and efficient investment behavior.\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;4 about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eOverall, these findings contribute to the growing literature on financial reporting and corporate governance by demonstrating that the economic impact of conservatism depends critically on the quality of external monitoring. Effective audits can preserve the disciplinary benefits of conservatism while attenuating its potential inefficiency costs, thereby fostering optimal capital allocation and sustainable firm growth.\u003c/p\u003e \u003c/div\u003e"},{"header":"5. Robustness Analyses and Sensitivity Tests","content":"\u003cp\u003eTo ensure the reliability and robustness of the main findings, we conduct several additional analyses using alternative measurement approaches for the key variables\u0026mdash;investment efficiency, audit quality, and accounting conservatism as well as complementary sensitivity checks. These analyses aim to confirm that the observed relationships are not driven by specific proxy choices or model assumptions.\u003c/p\u003e \u003cp\u003eAs a first robustness test, we re-estimate investment efficiency using the model proposed by Chen et al. (\u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2011\u003c/span\u003e), which captures the asymmetric response of investment to changes in sales growth. The model is specified as follows:\u003c/p\u003e \u003cp\u003eInvestmenti,t\u0026thinsp;=\u0026thinsp;β0\u0026thinsp;+\u0026thinsp;β1NEGi,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026thinsp;+\u0026thinsp;β2SalesGrowthi,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026thinsp;+\u0026thinsp;β3(NEGi,t\u0026thinsp;\u0026minus;\u0026thinsp;1\u0026times;SalesGrowthi,t\u0026thinsp;\u0026minus;\u0026thinsp;1)+εi,t\u003c/p\u003e \u003cp\u003ewhere Investment represents the net increase in tangible and intangible assets scaled by lagged total assets, SalesGrowth is the annual percentage change in sales, and NEG equals 1 if sales growth is negative, and 0 otherwise. This alternative measure accounts for nonlinearities in investment behavior. The results remain consistent with those of the baseline model, confirming that our main conclusions are not sensitive to the proxy used for investment efficiency.\u003c/p\u003e \u003cp\u003eIn the second robustness test, we re-examine audit quality (AQ) using two additional proxies commonly employed in the auditing literature.\u003c/p\u003e \u003cp\u003eRe-estimating the baseline model with these alternative proxies yields similar coefficient signs and significance levels, confirming that the moderating role of audit quality on the conservatism\u0026ndash;investment efficiency relationship is robust across different measures.\u003c/p\u003e \u003cp\u003eNext, to verify the robustness of the conservatism proxy, we complement the Khan and Watts (\u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2009\u003c/span\u003e) C-Score with two widely recognized alternatives:\u003c/p\u003e \u003cp\u003e*Basu (\u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e) measure, based on the asymmetric timeliness of earnings in recognizing losses relative to gains, estimated at the firm-year level; and\u003c/p\u003e \u003cp\u003e*Accrual-based measure (Givoly \u0026amp; Hayn, \u003cspan citationid=\"CR11\" class=\"CitationRef\"\u003e2000\u003c/span\u003e), defined as the negative of total accruals scaled by lagged total assets, capturing unconditional conservatism.\u003c/p\u003e \u003cp\u003eResults obtained from these alternative proxies confirm the stability of our findings. The relationship between conservatism and investment efficiency remains negative, while the interaction term between conservatism and audit quality remains positive and significant, reinforcing the moderating hypothesis.\u003c/p\u003e \u003cp\u003eFinally, several complementary sensitivity tests were conducted to validate the overall robustness of the results:\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eAlternative model specifications\u003c/b\u003e: random-effects and quantile regressions were estimated to explore potential distributional heterogeneity in investment behavior;\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003eSubsample analyses: regressions were re-estimated by industry and by investor protection level, producing consistent patterns;\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eLagged explanatory variables\u003c/b\u003e: one-year lags of conservatism and audit quality were introduced to mitigate simultaneity bias;\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eTemporal robustness\u003c/b\u003e: models were re-estimated excluding the 2020\u0026ndash;2021 COVID-19 period, with no material changes observed; and\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003e \u003cb\u003eMulticollinearity diagnostics\u003c/b\u003e: Variance Inflation Factors (VIFs) below 3 across all specifications confirm the absence of multicollinearity concerns.\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003cp\u003eOverall, these robustness and sensitivity analyses confirm the consistency and reliability of our main findings.\u003c/p\u003e \u003cp\u003eTable\u0026nbsp;6 reports the robustness analyses conducted to verify whether the main findings remain consistent under alternative measurement approaches for the key variables investment efficiency, audit quality, and accounting conservatism. Specifically, Column (1) re-estimates investment efficiency using the Chen et al. (\u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2011\u003c/span\u003e) specification. Column (2) replaces the baseline Big 4 proxy for audit quality with audit fees, while Column (3) substitutes the C-Score with the Basu (\u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e) measure of conservatism. Finally, Column (4) reports the results excluding the pandemic years (2020\u0026ndash;2021) to assess temporal robustness. The dependent variable is investment efficiency (Effi).\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;5 about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eThe results in Table\u0026nbsp;5 confirm the robustness of our main findings. Across all alternative specifications, accounting conservatism (CONSER) maintains a negative and significant association with investment efficiency, suggesting that excessive prudence continues to constrain optimal investment decisions. Audit quality (AQ) remains positive and significant, indicating that firms audited by higher-quality auditors whether measured by Big 4 status or audit fees exhibit more efficient investment behavior. Most importantly, the interaction term (CONSER \u0026times; AQ) consistently shows a positive and significant effect across all models, confirming that high audit quality mitigates the restrictive impact of conservatism. This reinforces the moderating hypothesis (H3), suggesting that effective audits enhance the informational credibility of conservative reporting and help balance managerial caution with efficient capital allocation. Finally, excluding the pandemic period (2020\u0026ndash;2021) does not materially change the results, demonstrating temporal stability and robustness.\u003c/p\u003e \u003cp\u003eTable\u0026nbsp;6a and Table\u0026nbsp;6b summarize the robustness results for over- and under-investment subsamples.\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;6a about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eFor over-investment, accounting conservatism (CONSER) remains negatively associated with excessive capital expenditures, indicating that conservative reporting disciplines managerial over-optimism and mitigates empire-building behavior. Audit quality exhibits a positive and significant effect, confirming its role in enhancing investment efficiency through better monitoring and information credibility. The interaction term (\u003cem\u003eCONSER \u0026times; AQ\u003c/em\u003e) remains positive and significant, suggesting that high-quality audits amplify the beneficial governance effect of conservatism.\u003c/p\u003e \u003cp\u003eTable\u0026nbsp;6b presents the robustness results for firms experiencing under-investment behavior. This subsample analysis examines whether the main findings hold when firms invest below their expected optimal level.\u003c/p\u003e \u003cp\u003e \u003cb\u003e\u0026ldquo;Table\u0026nbsp;6b about here\u0026rdquo;\u003c/b\u003e \u003c/p\u003e \u003cp\u003eThe results in Table\u0026nbsp;6b reveal a positive and significant association between accounting conservatism (CONSER) and under-investment (β\u0026thinsp;=\u0026thinsp;0.076, p\u0026thinsp;\u0026lt;\u0026thinsp;0.01), suggesting that excessive prudence leads managers to reject potentially profitable projects due to delayed recognition of future gains. Audit quality (AQ) exhibits a positive coefficient (β\u0026thinsp;=\u0026thinsp;0.061, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), consistent with the notion that high-quality audits improve the reliability of financial reporting and encourage more optimal investment decisions. Importantly, the interaction term (CONSER \u0026times; AQ) is negative and statistically significant (β = \u0026minus;0.048, p\u0026thinsp;\u0026lt;\u0026thinsp;0.05), indicating that audit quality mitigates the adverse impact of conservatism on investment behavior. This finding supports the moderating hypothesis (H3), showing that strong external audits can offset the restrictive nature of conservative accounting and restore managerial confidence in pursuing positive NPV projects.\u003c/p\u003e \u003cp\u003eOverall, these findings highlight that while conservatism may induce under-investment when applied excessively, its negative effects are reduced when firms engage high-quality auditors, reinforcing the complementary roles of accounting prudence and audit oversight.\u003c/p\u003e \u003cp\u003eFor under-investment, conservatism displays a positive and significant coefficient, supporting the view that excessive prudence constrains managerial flexibility and discourages risky but value-enhancing projects. However, the interaction term between conservatism and audit quality is negative and significant, implying that reputable auditors help alleviate this restrictive effect by improving investor confidence and reducing informational asymmetry.\u003c/p\u003e \u003cp\u003eOverall, the robustness and sensitivity tests confirm the consistency of the main findings.\u003c/p\u003e \u003cp\u003eAccounting conservatism exerts a dual influence on investment decisions: while it reduces over-investment by enforcing financial discipline, it may also induce under-investment when applied excessively. Audit quality moderates both effects enhancing conservatism\u0026rsquo;s disciplinary benefits while mitigating its restrictive side.\u003c/p\u003e \u003cp\u003eFrom a theoretical standpoint, these findings extend the agency and conservatism literature by showing that the governance value of conservatism depends on audit quality.\u003c/p\u003e \u003cp\u003eFrom a practical perspective, they suggest that firms should complement prudent accounting with high-quality external auditing to achieve optimal investment efficiency. Regulators and standard-setters should also recognize the synergistic effect between conservative reporting and strong audit practices in promoting efficient capital allocation and transparent financial markets.\u003c/p\u003e"},{"header":"6. Conclusion","content":"\u003cp\u003eThis study investigates how accounting conservatism and audit quality jointly influence firms\u0026rsquo; investment efficiency, using a large panel of European listed companies from 2013 to 2023. The results show that accounting conservatism is negatively associated with investment efficiency, consistent with the notion that excessive prudence may delay the recognition of good news and discourage value-creating projects. However, this adverse effect is significantly mitigated when firms are audited by high-quality auditors, particularly those affiliated with Big 4 firms. This finding supports the moderating role of audit quality in transforming conservative reporting into a governance-enhancing mechanism that improves investment efficiency.\u003c/p\u003e \u003cp\u003eThe robustness analyses confirm these conclusions across multiple specifications and proxy definitions. Alternative measures of investment efficiency (Chen et al., \u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2011\u003c/span\u003e), conservatism (Basu, \u003cspan citationid=\"CR2\" class=\"CitationRef\"\u003e1997\u003c/span\u003e; Givoly \u0026amp; Hayn, \u003cspan citationid=\"CR11\" class=\"CitationRef\"\u003e2000\u003c/span\u003e), and audit quality (tenure, audit fees) yield consistent results. Subsample tests by industry and investor protection level, as well as temporal robustness excluding the 2020\u0026ndash;2021 COVID-19 period, reinforce the validity of the findings.\u003c/p\u003e \u003cp\u003eThis paper contributes to the literature by integrating financial reporting conservatism and audit quality within a unified framework of investment efficiency. The evidence highlights that high audit quality enhances the informational role of conservative accounting, facilitating more efficient capital allocation. For policymakers and practitioners, these results underline the importance of promoting both transparent reporting and strong audit oversight as complementary mechanisms for improving investment decisions and sustaining market confidence. Future research could extend this framework by incorporating digital audit technologies, ESG disclosures, or cross-country institutional factors affecting the conservatism\u0026ndash;efficiency nexus.\u003c/p\u003e"},{"header":"Declarations","content":"\u003cp\u003e\u003cstrong\u003eFunding\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe author received no financial support for the research, authorship, and/or publication of this article.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eConflict of interest\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003eThe author declares that there is no conflict of interest.\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\u003cli\u003e\u003cspan\u003eAidytya Hidayatulah A, Ratnawati V, Rusli S (2025) The Effect of Accounting Conservatism and Cost of Debt on Tax Avoidance with CSR as a Moderation Variable. 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J Econ Sustain 3(2):46\u0026ndash;55\u003c/span\u003e\u003c/li\u003e\u003c/ol\u003e"},{"header":"Tables","content":"\u003cp\u003e\u003cstrong\u003eTable I.\u003c/strong\u003e Descriptive Statistics\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\" width=\"620\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eN of obs\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eMean\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eStd. Dev.\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eMin\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eMax\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eEffi\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.119\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.251\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-5.699\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.00009\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eOveri\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e878\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.209\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.471\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-5.699\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.00009\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eUnderi\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3092\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.095\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.117\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-4.149\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.0005\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.000\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.066\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.718\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.811\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLev\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.298\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1.31\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e26.291\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eTang\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.399\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.239\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e-0.360\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e6.129\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.511\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.001\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.307\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.611\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e4.051\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.858\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.689\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e6.698\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e16.311\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1.544\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e10.388\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e20.712\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"2\" valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eModality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"3\" valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eProportion\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"2\" valign=\"top\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"3\" valign=\"top\"\u003e\n \u003cp\u003e0.606\u003c/p\u003e\n \u003cp\u003e0.391\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003eNotes: This table reports descriptive statistics for the main variables used in the analysis.CONSER = accounting conservatism (C-Score), AQ = audit quality (Big 4 indicator), Lev = leverage (total debt / total assets), Tang = tangibility (fixed assets / total assets), ROA = return on assets, LnSales = natural logarithm of sales, LnAge = natural logarithm of firm age, Size = logarithm of total assets. Data are sourced from the Datastream database.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable II.\u0026nbsp;\u003c/strong\u003ePearson Correlation Matrix\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\" width=\"709\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(4)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(5)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(6)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(7)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(8)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1) Effi\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2)CONSR\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.201***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3) AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.268***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.142**\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(4) Lev\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.126**\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.063\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.051\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(5) Tang\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.094*\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.025\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.077\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.241***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(6) ROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.191***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.084*\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.148***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.129**\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.077\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(7) LnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.062\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.023\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026ndash;0.043\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.068\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.060\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.172***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\u003cbr\u003e\u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(8) Size\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.221***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.145*\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.182***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.088*\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.059\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.416***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.131**\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003e\u003cstrong\u003eNotes:\u003c/strong\u003e this table reports the Pearson correlation matrix and multicollinearity diagnostics for the main variables included in the analysis. CONSER denotes accounting conservatism (C-Score); AQ refers to audit quality (Big 4 indicator); Lev is leverage (total debt to total assets); Tang represents asset tangibility (fixed assets to total assets); ROA denotes return on assets; LnSales is the natural logarithm of sales; LnAge is the natural logarithm of firm age; and Size represents firm size, measured as the logarithm of total assets. Statistical significance levels are indicated as p \u0026lt; 0.10, p \u0026lt; 0.05, and p \u0026lt; 0.01 (two-tailed).\u003c/p\u003e\n\u003cp\u003e\u003cbr\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable III.\u003c/strong\u003e Regression Results: Conservatism, Audit Quality, and Investment Efficiency\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1) Base Model\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2) + Audit Quality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)+ \u0026nbsp;(Moderation)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.079*** (\u0026minus;3.59)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.076*** (\u0026minus;3.45)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.072*** (\u0026minus;3.19)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ(Audit Quality)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.063** (2.08)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.061** (2.15)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u0026times; AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLeverage\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.046 (\u0026minus;1.31)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.043 (\u0026minus;1.26)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.044 (\u0026minus;1.28)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eTangibility\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.059** (\u0026minus;2.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.056** (\u0026minus;1.94)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.054** (\u0026minus;1.89)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.041** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039** (2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.037* (1.85)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.019 (\u0026minus;0.84)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.020 (\u0026minus;0.89)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.021 (\u0026minus;0.89)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.046** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.047** (2.05)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.048** (2.07)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eYear Fixed Effects\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eIndustry.Fixed Effects\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCountry.Fixed Effects\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAdj. R\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.23\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.25\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.29\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eObservations (N)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e3970\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eWald \u0026chi;\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e121.37***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e138.52***\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e154.66***\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003eNotes: This table reports the results of panel regressions examining the effect of accounting conservatism (CONSER) and audit quality (AQ) on investment efficiency (Effi). Model (1) presents the baseline estimation including control variables. Model (2) introduces audit quality, and Model (3) adds the interaction term (CONSER \u0026times; AQ) to test the moderating effect of audit quality on the relationship between conservatism and investment efficiency. All regressions include firm-level control variables (Leverage, Tangibility, ROA, LnAge, and Size), as well as year, industry, and country fixed effects. Standard errors are clustered at the firm level to correct for autocorrelation and heteroskedasticity. Variable definitions are provided in Table 1. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.\u003c/p\u003e\n\u003cp\u003e\u003cbr\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable IV.\u003c/strong\u003e Regression Results: Under- and Over-Investment Models\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\" width=\"728\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd rowspan=\"2\" valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"2\" valign=\"top\" style=\"width: 206px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1) Base Model\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"2\" valign=\"top\" style=\"width: 208px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2) + Audit Quality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd colspan=\"2\" valign=\"top\" style=\"width: 217px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)+ \u0026nbsp;(Moderation\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eUnder\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eOver\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eUnder\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eOVER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eUnder\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eOVER\u003c/strong\u003e\u003c/p\u003e\n \u003cp\u003e\u003cstrong\u003e\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.049** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026ndash;0.058***(-3.11)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.054** (2.06)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026ndash;0.062**(-3.18)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.058** (2.07)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u0026ndash;0.064**(-.10)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.043* (1.87)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.051** (2.18)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.045* (1.87)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e0.052** (2.19)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER \u0026times; AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026mdash;\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026minus;0.041**(\u0026minus;2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e-0.064***(-.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eLeverage\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.026 (1.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026minus;0.035(\u0026minus;1.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.027 (1.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026minus;0.035 (\u0026minus;1.11)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.028 (1.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u0026minus;0.035 (\u0026minus;1.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eTangibility\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.044** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026minus;0.051**(\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.047**(1.99)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026minus;0.052**(\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.049** (1.99)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u0026minus;0.052** (\u0026minus;2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026minus;0.025* (\u0026minus;1.74)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e0.033** (2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026minus;0.030*(\u0026minus;1.76)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.034** (2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026minus;0.031* (\u0026minus;1.81)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e0.034** (2.05)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.018 (0.91)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u0026minus;0.018 (\u0026minus;0.81)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.020 (0.92)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026minus;0.018 \u0026minus;0.80)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.020 (0.93)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u0026minus;0.019 (\u0026minus;0.82)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026minus;0.034**(\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e0.053** (2.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u0026minus;0.040**(\u0026minus;2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.054** (2.05)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u0026minus;0.042**(\u0026minus;2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e0.056** (2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eYear FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eIndustry.FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eCountry.FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eAdj. R\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.23\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e0.23\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.25\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e0.21\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e0.29\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e0.21\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\" style=\"width: 97px;\"\u003e\n \u003cp\u003e\u003cstrong\u003eWald \u0026chi;\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e121.25***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 105px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e121.25***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e138.52***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 104px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e121.25***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 101px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e154.66***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\" style=\"width: 116px;\"\u003e\n \u003cp\u003e\u003cstrong\u003e121.25***\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003eNotes: This table presents the results of fixed-effects regressions examining the determinants of over- and under-investment. \u0026nbsp; Dependent variables are \u003cem\u003eOverI\u003c/em\u003e (column 1) and \u003cem\u003eUnderI\u003c/em\u003e (column 2), defined as positive and negative residuals from the investment model, respectively. Standard errors (in parentheses) are clustered at the firm level.\u003c/p\u003e\n\u003cp\u003e***, **, * denote significance at the 1%, 5%, and 10% levels, respectively.\u003c/p\u003e\n\u003cp\u003e\u003cbr\u003e\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable V.\u0026nbsp;\u003c/strong\u003eRobustness Analyses and Sensitivity Tests\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1)Alternative Investment Efficiency\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2)Alternative Audit Quality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)Alternative Conservatism\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(4)Excluding2020\u0026ndash;2021(Pandemic Period)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.069*** (\u0026minus;3.08)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.073*** (\u0026minus;3.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.070*** (\u0026minus;3.18)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.072*** (\u0026minus;3.11)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.059** (2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.062** (2.16)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.061** (2.14)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.062** (2.09)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER \u0026times; AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.028* (1.89)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.031** (2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.030** (2.07)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.031** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLeverage\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.043 (\u0026minus;1.15)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.046 (\u0026minus;1.29)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.044 (\u0026minus;1.30)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.044 (\u0026minus;1.32)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eTangibility\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.051* (\u0026minus;1.78)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.057* (\u0026minus;1.91)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.052* (\u0026minus;1.88)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.058* (\u0026minus;1.92)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.036* (1.77)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.040* (1.87)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.037* (1.81)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039* (1.88)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.019 (\u0026minus;0.79)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.024 (\u0026minus;0.90)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.022 (\u0026minus;0.91)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.020 (\u0026minus;0.91)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.044** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.051** (2.08)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.049** (2.11)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.050** (2.09)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eYear /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eIndustry /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCountry.FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAdj. R\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.31\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.30\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.29\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.32\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003e\u003cstrong\u003eNotes:\u003c/strong\u003e This table reports robustness tests of the relationship between accounting conservatism (CONSER), audit quality (AQ), and investment efficiency (Effi).Column (1) re-estimates investment efficiency using the asymmetric investment model of \u003cem\u003eChen et al. (2011)\u003c/em\u003e.Column (2) replaces the baseline Big 4 indicator of audit quality with an alternative proxy (audit fees or tenure).Column (3) replaces the \u003cem\u003eKhan and Watts (2009)\u003c/em\u003e C-Score with an alternative conservatism measure (Basu, 1997, or Givoly \u0026amp; Hayn, 2000).Column (4) excludes the 2020\u0026ndash;2021 pandemic years to test temporal stability.All regressions include year, industry, and country fixed effects.Robust t-statistics are reported in parentheses.*, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable VIa\u003c/strong\u003e. Robustness Tests \u0026ndash; Over-Investment Subsample\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1)Alternative Over-invest\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2)Alternative Audit Quality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)Alternative Conservatism\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(4)Excluding 2020\u0026ndash;2021\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.060***(\u0026minus;3.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.061***(\u0026minus;3.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.060***(\u0026minus;3.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.059***(\u0026minus;3.09)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.049** (2.17)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.050** (2.18)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.049** (2.19)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.048** (2.17)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u0026times; AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039** (2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.040** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039** (2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.038** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLeverage\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.034 (\u0026minus;1.10)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.035 (\u0026minus;1.13)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.034 (\u0026minus;1.12)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.033 (\u0026minus;1.09)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eTangibility\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.049** (\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.050** (\u0026minus;2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.050** (\u0026minus;1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.051** (\u0026minus;2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.032** (2.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.033** (2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.033** (2.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.031** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.015 (\u0026minus;0.79)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.015 (\u0026minus;0.81)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.016 (\u0026minus;0.80)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.014 (\u0026minus;0.80)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.042** (2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.041** (2.06)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.042** (2.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.040** (1.99)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eYear /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eIndustry /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCountry.FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAdj. R\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.23\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.22\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.23\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.21\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003e\u003cstrong\u003eNotes:\u003c/strong\u003e This table presents robustness tests for the subsample of firms classified as over-investors, i.e., firms exhibiting positive residuals from the investment model. The dependent variable (Overᵢ,ₜ) represents over-investment intensity. The results are consistent with the baseline regressions, showing that accounting conservatism is negatively related to over-investment, while higher audit quality mitigates this effect. All models control for firm-specific characteristics (Leverage, Tangibility, ROA, Age, Size, Sales) and include fixed effects by year, industry, and country. Standard errors are clustered at the firm level. ***, **, * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eTable VIb\u003c/strong\u003e. Robustness Tests \u0026ndash; Under-Investment Subsample\u003c/p\u003e\n\u003ctable border=\"1\" cellspacing=\"0\" cellpadding=\"0\"\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eVariables\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(1)Alternative Under-Investment\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(2)Alternative Audit Quality\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(3)Alternative Conservatism\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003e(4)Excluding2020\u0026ndash;2021 (Pandemic Period)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.049** (2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.050** (2.05)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.055** (2.06)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.050** (2.05)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.039* (1.84)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.041* (1.87)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.044* (1.88)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.042* (1.86)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCONSER\u0026times; AQ\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.038** (\u0026minus;2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.040**(\u0026minus;2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.042**(\u0026minus;2.04)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.040** (\u0026minus;2.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLeverage\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.026 (1.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.027 (1.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.027 (1.08)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.026 (1.03)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eTangibility\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.044** (1.97)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.044** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.045** (1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.044** (1.97)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eROA\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.028* (\u0026minus;1.64)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.028* (\u0026minus;1.77)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.029* (\u0026minus;1.76)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.027* (\u0026minus;1.80)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eLnAge\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.019 (1.02)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.019 (0.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.021 (0.99)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.020 (0.92)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eSize\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.041** (\u0026minus;1.98)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.038** (\u0026minus;2.01)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.038** (\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u0026minus;0.039** (\u0026minus;2.00)\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eYear /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eIndustry /\u0026nbsp;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eCountry.FE\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003eYes\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e\u003cstrong\u003eAdj. R\u0026sup2;\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.27\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.27\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.28\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd valign=\"top\"\u003e\n \u003cp\u003e0.27\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n\u003c/table\u003e\n\u003cp\u003e\u003cstrong\u003eNotes:\u003c/strong\u003e This table presents robustness results for the \u003cstrong\u003eunder-investment\u003c/strong\u003e subsample (firms with negative residuals from the investment model). The dependent variable (Underᵢ,ₜ) measures under-investment intensity. Results confirm that conservative reporting tends to exacerbate under-investment, but this adverse effect is attenuated in firms audited by high-quality auditors, consistent with the moderating hypothesis (H3). Control variables and fixed effects are included as in previous models. Clustered standard errors are reported at the firm level. ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively.\u003c/p\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"University of Sfax","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"accounting conservatism, audit quality, investment efficiency, under-investment, over-investment, financial reporting, agency theory, European firms","lastPublishedDoi":"10.21203/rs.3.rs-8466701/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-8466701/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis study examines how accounting conservatism and external audit quality jointly affect firms\u0026rsquo; investment efficiency, with a particular focus on under-investment and over-investment behavior. It also investigates whether audit quality moderates the influence of conservative financial reporting on investment decisions. The analysis uses a panel dataset of 397 European listed companies from the STOXX Europe 600 index over the 2014\u0026ndash;2023 period, covering nine sectors and 17 countries. Investment efficiency is measured following Biddle et al. (\u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e2009\u003c/span\u003e), while accounting conservatism is captured using the Khan and Watts (\u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2009\u003c/span\u003e) C-Score. Panel regressions with industry, country, and year fixed effects are employed to test the hypotheses. The results indicate that accounting conservatism is negatively associated with investment efficiency and significantly increases under-investment by discouraging managers from undertaking positive-NPV projects, while its effect on over-investment is not statistically significant. Audit quality moderates this relationship by mitigating the adverse impact of conservatism on under-investment and enhancing overall investment efficiency. The findings highlight the governance role of external auditors in improving the reliability of conservative accounting and promoting more efficient capital allocation. This study contributes to the literature by integrating conservatism and audit quality into a unified framework of investment efficiency and provides new evidence from a European context on how external assurance interacts with accounting prudence to shape corporate investment decisions.\u003c/p\u003e","manuscriptTitle":"Do High-Quality Auditors Mitigate the Real Effects of Accounting Conservatism? Evidence from Europe","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2026-01-06 12:27:03","doi":"10.21203/rs.3.rs-8466701/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"60b0ca52-da8c-4105-96c8-681c98317aa7","owner":[],"postedDate":"January 6th, 2026","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2026-01-06T12:27:03+00:00","versionOfRecord":[],"versionCreatedAt":"2026-01-06 12:27:03","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-8466701","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-8466701","identity":"rs-8466701","version":["v1"]},"buildId":"XKTyCvWXoU3ODBz1xrDgd","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}