Litigation risk,accounting quality,and investment efficiency |
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Authors: | Hyeesoo H Chung Jinyoung P Wynn Han Yi |
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Institution: | 1. Arizona State University, United States;2. Louisiana Tech University, United States;3. Korea University, Republic of Korea |
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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. |
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Keywords: | Directors' & officers' (D& O) liability insurance Litigation risk Accruals quality Investment efficiency Investment cash flow sensitivity |
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