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This paper aims to examine the effect of conditional conservatism on audit fees and whether the firm’s engagement in sustainable practices moderates the relationship between conditional conservatism and audit fees.

Using a sample of 3,767 firm-year observations from 14 European Union countries over the period of 2006–2019, the authors adopt the ordinary least square estimator to perform a panel data analysis of the effect of conditional conservatism on audit fees, and the moderating role of the environmental, social and governance (ESG) scores on the relationship between conditional conservatism and audit fees.

The authors find that conditional conservatism has a significant negative effect on audit fees, suggesting that auditors charge lower audit fees on more conservative clients. The authors also find that firms engaging in ESG actions, whether combined or individual, pay higher audit fees. More interestingly, the authors provide evidence that the negative effect of conditional conservatism on audit fees is mitigated only when ESG performance is considered in combination. This implies that firms exhibiting less commitment to ESG sustainability practices are prone to paying reduced audit fees when engaged in more conservative reporting. The findings remain robust after conducting a battery of tests.

The findings of this study have practical implications for several parties, including companies, auditors and regulators. This study emphasizes the potential benefit associated with using conservative accounting practices in terms of shaping downward the amount of audit fees. However, it also highlights the importance of considering the additional audit costs associated with higher ESG scores when making decisions about implementing sustainable practices.

Unlike prior studies that investigate the direct impact of sustainable practices on audit fees, the present work contributes to the literature on the benefits and costs of ESG by examining the moderating role of ESG performance in the association between audit fees and conditional conservatism. To the best of the authors’ knowledge, this study is the first to examine this relationship. Theoretically, the research integrates the theories of audit risk and agency to provide a more comprehensive understanding of the drivers of audit fees.

Most research suggests that capital structure is influenced by two elements: the firms’ internal and external characteristics. This study aims to add knowledge to the literature by analyzing the impact of firms’ financial information quality on capital structure options. Financial reports are the principal basis for most financial decisions, so their quality and content heavily influence firms’ financial choices.

An unbalanced panel sample of 414 listed firms on the main stock exchanges of Portugal (PSI), Italy (FTSE/MIB), Greece (FTSE/ATHEX) and Spain (IBEX 35) between 2013 and 2022 is analyzed. To achieve a more comprehensive result, capital structure and financial reporting quality are measured through multiple proxies. Capital structure is evaluated by the total and the maturity debt ratios, based on book and market values, and financial reporting quality is measured through four proxies: accruals quality, smoothness, timeliness and accounting conservatism.

The global analysis revealed mixed results, with three variables of the financial reporting quality exhibiting a positive impact on debt (accruals quality, smoothness and accounting conservatism), while the remaining proxy presented a negative impact (timeliness). Further analysis also indicates that companies affected by Troika policies experienced a contrasting effect of timeliness on debt, while the other firms displayed results consistent with the global analysis.

This work contributes to enlarging the capital structure debate by analyzing the impact of financial reporting quality, an effect little addressed by previous literature. Moreover, several proxies of financial reporting quality are used. Besides accruals quality or earnings management proxy, which is the most analyzed, the authors also include the proxies of smoothness and accounting conservatism, little investigated and timeliness that were not considered by previous researchers. Additionally, as control variables, not only firms’ specific characteristics are included but also macroeconomic factors. Therefore, the contributions of the paper are relevant to all stakeholders to broaden knowledge of factors that define the capital structure, as well as the relevance of firms to display financial reporting with quality.