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Litigation risk, accounting quality, and investment efficiency

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  • Chung, Hyeesoo H.
  • Wynn, Jinyoung P.
  • Yi, Han

Abstract

This paper examines the moderating effect of litigation risk on the relationship between accounting quality and investment efficiency. We use directors’ and officers’ (D&O) liability insurance as a proxy for litigation risk, accruals quality for accounting quality, and investment cash flow sensitivity for investment efficiency (Biddle & Hilary, 2006; Hovakimian & Hovakimian, 2009). Using Canadian data from 1998 to 2008, we show that firms with higher D&O insurance coverage exhibit lower quality accruals. Moreover, the previously documented negative association between accruals quality and investment cash flow sensitivity is stronger (weaker) when abnormal D&O coverage is low (high), suggesting that the role of accounting quality in facilitating investment efficiency is conditional upon observable litigation risk.

Suggested Citation

  • Chung, Hyeesoo H. & Wynn, Jinyoung P. & Yi, Han, 2013. "Litigation risk, accounting quality, and investment efficiency," Advances in accounting, Elsevier, vol. 29(2), pages 180-185.
    • Handle: RePEc:eee:advacc:v:29:y:2013:i:2:p:180-185
    DOI: 10.1016/j.adiac.2013.09.009
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