Unintended costs of a dual regulatory environment: Evidence from state-level cannabis legalization and bank audit fees |
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| Affiliation: | 1. Colorado State University, United States;2. Drexel University, United States;1. University of Wisconsin – Milwaukee, Lubar School of Business, P.O. Box 742, Milwaukee, WI 53201, USA;2. East Carolina University, 3412 Bate Building, Greenville, NC 27858, USA;1. Trier University, Universitätsring 15, 54296 Trier, Germany;2. Lancaster University Management School, Bailrigg, Lancaster LA1 4YX, United Kingdom;3. Erasmus School of Economics, Burgemeester Oudlaan 50, 3062 PA Rotterdam, the Netherlands;1. The Robert J. Manning School of Business, University of Massachusetts Lowell, One University Avenue, Lowell, MA 01854, USA;2. College of Business and Economics, California State University, Los Angeles, 5151 State University Drive, Los Angeles, CA 90032, USA;1. Auburn University, Harbert College of Business, 301 Lowder Hall, Auburn, AL 36849, United States;2. Kennesaw State University, United States;3. John Carroll University, United States;1. Hong Kong Polytechnic University, Hong Kong;2. Western Washington University, United States;3. University of Washington Tacoma, United States |
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| Abstract: | ![]()
Since 2014, a number of U.S. states have legalized business activities related to the production, distribution, and use of recreational cannabis. These activities remain illegal at the U.S. federal level, creating a dual regulatory environment. The uncertainty related to the enforcement of federal cannabis laws affects businesses located in legalizing states, particularly federally-insured banks. Applying a difference-in-differences approach to a matched sample of banks in legalizing and non-legalizing states, we document an increase in audit fees incurred by banks located in legalizing states after cannabis legalization. This finding is consistent with increased auditor effort and engagement risk being an unintended consequence of state-level recreational cannabis legalization. In supplemental analysis, we find that the relation between banks’ audit fees and cannabis legalization was greater for banks having larger increases in banking activity, suggesting that audit fees increased primarily for banks that may be engaging in relationships with cannabis-related businesses. |
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| Keywords: | Audit fees Banking Cannabis legalization Conflicting regulatory environment Enforcement uncertainty G28 M42 M48 |
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