The impact of ESG performance on audit fees - a study based on a two-way fixed effects model

With the continuous promotion of the construction of beautiful China and ecological civilization, the concept of sustainable and green development has become increasingly popular. In recent years, enterprises' environmental social and governance (ESG) performance has received widespread attention in China. This paper selects panel data of A-share listed companies in Shanghai and Shenzhen from 2011 to 2020 and uses a two-way fixed-effects model to explore the relationship between ESG performance of listed companies and audit fees. Robustness and endogeneity tests of the empirical structure are performed by replacing explanatory variables and regressing explanatory variables with a one-period lag. The effect of firm heterogeneity characteristics on the relationship between the two is further examined through subsample regressions according to the nature of enterprises and audit institutions. We find a strong negative association between ESG performance and audit fees, meaning that better ESG performance of firms in China leads to lower audit fees. Also, it is tested that the negative effect of ESG performance on audit fees is more significant when the firm is a non-state owned firm and when audited by Big Four accounting firms. The empirical results of this paper will well enrich the study on the impact of ESG performance on firms and broaden the research on the factors influencing audit fees.