Judicial hellholes and other differential characteristics: is state-level legal risk reflected in audit fee pricing?
ISSN: 0268-6902
Article publication date: 12 April 2022
Issue publication date: 21 April 2022
Abstract
Purpose
This study aims to examine the effect of state-level legal risk on audit fee pricing in the USA. This study hypothesizes that auditors are more likely to charge higher audit fees to clients headquartered in states with higher legal risk in terms of probability of being sued, expected size of damages allocated to the auditors and breadth of third parties able to claim damages.
Design/methodology/approach
This study hypothesizes that higher state-level legal risk leads to higher audit fees. To test this, this study estimates ordinary least squares regressions of audit fees for 56,576 company years from 2001 to 2018 with the three measures of state legal risk and other factors known to affect audit fees.
Findings
This study finds that state-level legal risk is positively associated with audit fee pricing for two of three measures. Interestingly, the third measure, breadth of third parties able to claim damages, is negatively associated with audit fees.
Originality/value
To the best of the authors’ knowledge, this paper fulfills an identified need and is the first study to comprehensively test the association between state-level differentials in legal risk and audit fees.
Keywords
Acknowledgements
The authors thank workshop participants at Weber State University and the BYU Accounting Research Symposium for their comments. The authors also thank Eric Condie, Conrad Naegle and Mason Snow for their comments.
Citation
Hansen, J.C., Murray, S.M., Park, S.H. and Shin, N. (2022), "Judicial hellholes and other differential characteristics: is state-level legal risk reflected in audit fee pricing?", Managerial Auditing Journal, Vol. 37 No. 5, pp. 594-624. https://doi.org/10.1108/MAJ-11-2020-2917
Publisher
:Emerald Publishing Limited
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