The double-edged sword of ESG: impression management and audit pricing efficiency across auditor quality

Yirong Lu, Yusuf Karbhari, Xin Yang and Yunxi Wang

Managerial Auditing Journal, 2026, vol. 41, issue 7, 1410-1440

Abstract: PurposeThis study aims to investigate the impact of environmental, social and governance (ESG) performance on audit pricing and examine how linguistic impression management in annual reports reshapes this relationship. Specifically, it explores the role of abnormal positive tone as a mechanism that either facilitates or suppresses the transmission of ESG signals into audit fees across auditors of differing quality.Design/methodology/approachUsing a panel data set of 3,386 nonfinancial Chinese listed firms from 2010 to 2022, this study integrates textual analysis with econometric modeling to quantify abnormal positive tone and assess its interaction with ESG performance. The analysis uses a dual-path framework to disentangle substantive risk-mitigation signals from symbolic rhetorical manipulation. To ensure robustness, this study incorporates alternative ESG measures, lagged variables, propensity score matching and Heckman two-stage models.FindingsResults reveal that ESG performance significantly reduces audit fees exclusively for firms audited by high-quality auditors, suggesting that these auditors effectively translate ESG credentials into lower risk assessments. In contrast, this relationship is absent among lower-quality auditors. Crucially, this study identifies a significant suppression effect among the lower-quality auditors: while superior ESG performance reduces inherent risk, it simultaneously induces abnormal positive tone, where the upward pricing pressure from identified narrative risks offsets the risk-mitigating benefits of ESG performance. This internal conflict between substantive signals and rhetorical noise leads to pricing paralysis, where the fee-reduction benefits of ESG are effectively neutralized. Conversely, high-quality auditors exhibit governance-deterrence, filtering out narrative noise to achieve superior audit pricing efficiency.Originality/valueThis study contributes to the audit pricing literature by introducing narrative tone as a behavioral channel through which ESG performance shapes auditors’ judgments. It integrates impression management theory with audit quality and reputation frameworks, offering a nuanced understanding of how linguistic cues influence risk perception. Methodologically, it advances research on nonfinancial conduct by operationalizing narrative tone as a measurable indicator of disclosure risk, highlighting that audit quality is the fundamental determinant of whether ESG performance is priced as a reliable signal or dismissed as rhetorical noise.

Keywords: ESG performance; Audit fees; Impression management; Abnormal positive tone; Audit quality; Pricing efficiency (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-04-2025-4767

DOI: 10.1108/MAJ-04-2025-4767

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