The effect of auditor litigation risk on clients' access to bank debt: Evidence from a quasi-experiment

• 成果类型: Article
• 署名作者: Chy, Mahfuz; De Franco, Gus; Su, Barbara
• 署名单位: University of Missouri System; University of Missouri Columbia; Tulane University; Pennsylvania Commonwealth System of Higher Education (PCSHE); Temple University
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2020.101354
• 发表日期: 2021
• 关键词: ACCOUNTING CONSERVATISM; corporate governance; contracting evidence; LEGAL LIABILITY; QUALITY; earnings; INFORMATION; INVESTMENT; STANDARDS; IMPACT

摘要

We exploit staggered state-level shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client companies' access to private debt markets. We find that an exogenous increase in auditor litigation risk leads to an increase in both clients' likelihood of receiving bank loans and the average amount of the bank loans that clients receive. In support of our proposed mechanism that auditor litigation risk leads to improvements in clients' audit and financial reporting quality, we find that these same shocks lead to a reduction in accruals, an increase in going-concern opinions, a decrease in restatements, and an improvement in accruals' ability to predict future cash fiows. We also find that increased auditor litigation risk leads to an increase in the contractibility of cli-ents? accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing. ? 2020 Elsevier B.V. All rights reserved. We exploit staggered state-level shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client companies' access to private debt markets. We find that an exogenous increase in auditor litigation risk leads to an increase in both clients' likelihood of receiving bank loans and the average amount of the bank loans that clients receive. In support of our proposed mechanism that auditor litigation risk leads to improvements in clients' audit and financial reporting quality, we find that these same shocks lead to a reduction in accruals, an increase in going-concern opinions, a decrease in restatements, and an improvement in accruals' ability to predict future cash fiows. We also find that increased auditor litigation risk leads to an increase in the contractibility of clients? accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing.