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Universal demand laws and stakeholders: Evidence from the auditor's perspective

Author

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  • Bilokha, Alona
  • Kong, Joon Ho
  • Micale, Joseph A.

Abstract

This study analyzes the impact of universal demand (UD) laws, which limit shareholders' ability to initiate derivative litigation against firms and auditors, on the behavior of external auditors. After confirming that UD laws reduce the likelihood that clients (auditors) will be named in this type of litigation, we find that firms incorporated in states that have adopted UD laws have lower increases in audit fees than states that have not adopted such laws. These results are magnified for firms when the client's (auditor's) bargaining power is high (low) but not for those actively engaged in derivative litigation, suggesting that auditors are able to distinguish actively the firms that benefit from the lower risk of derivative litigation. We do not find evidence that reporting quality declines as a result of these reduced fees. Our results suggest that UD laws relieve unnecessary burdens imposed by excessive derivative litigation on firms and auditors.

Suggested Citation

  • Bilokha, Alona & Kong, Joon Ho & Micale, Joseph A., 2024. "Universal demand laws and stakeholders: Evidence from the auditor's perspective," Advances in accounting, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:advacc:v:67:y:2024:i:c:s0882611024000373
    DOI: 10.1016/j.adiac.2024.100766
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    More about this item

    Keywords

    Audit fees; Derivative litigation; Financial reporting quality; Audit quality; Litigation risk; Universal demand law;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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