TY - JOUR
T1 - Universal demand laws and stakeholders
T2 - Evidence from the auditor's perspective
AU - Bilokha, Alona
AU - Kong, Joon Ho
AU - Micale, Joseph A.
N1 - Publisher Copyright: © 2024 Elsevier Ltd
PY - 2024
Y1 - 2024
N2 - 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.
AB - 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.
KW - Audit fees
KW - Audit quality
KW - Derivative litigation
KW - Financial reporting quality
KW - Litigation risk
KW - Universal demand law
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U2 - 10.1016/j.adiac.2024.100766
DO - 10.1016/j.adiac.2024.100766
M3 - Article
SN - 0882-6110
JO - Advances in Accounting
JF - Advances in Accounting
M1 - 100766
ER -