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AN EMPIRICAL ANALYSIS OF THE INSURANCE HYPOTHESIS OF AUDITING, AUDIT QUALITY AND AUDITOR LITIGATION

Posted on:1998-09-28Degree:PH.DType:Thesis
University:THE FLORIDA STATE UNIVERSITYCandidate:PACINI, CARL JOSEPHFull Text:PDF
GTID:2469390014477342Subject:Business Administration
Abstract/Summary:PDF Full Text Request
The last twenty-five years has witnessed a surge in litigation against public accounting firms. The purpose of this dissertation was to examine empirically the association between the announcement of litigation against Big 6 (8) accounting firms and market effects on audit clients. Forty-four lawsuits over a nineteen-year period (1976-1994) were investigated. The analysis focused on whether client firms experienced share price reactions due to a perceived reduction in audit quality and/or loss of auditor-supplied insurance (the "insurance hypothesis").; The 1976-1994 period was divided into three legal regimes based on changes in auditor liability law. The analysis revealed that all forty-four lawsuits as a group did not exhibit any significant negative share price reactions. Significant share price reactions were detected for a group of lawsuits announced during the 1988-1994 period. Investors appear to react to those lawsuits which were perceived material to an auditing firm's ability to pay damages or reducing the audit quality provided by the sued auditor.; This dissertation expands knowledge of the market's reaction to shifts in auditor liability law. Findings of significantly different share price reactions indicate that shifts in auditor liability rules are associated with changes in investors' value assessments assigned to the legal right to sue auditors.; This study also furthers understanding of the importance of auditor-supplied insurance and audit quality to higher versus lower business (litigation) risk client firms. When size was used as a proxy for litigation risk no significant difference in the share price reactions of large versus small firms was detected. In one limited context (lawsuits with negative price reactions), evidence revealed that the largest client firms had lower abnormal returns than the smallest. No significant difference in the share price reactions of client firms partitioned on probability of bankruptcy was noted. In one legal regime, results demonstrated that larger, financially distressed client firms experienced lower abnormal returns than larger, healthy clients. Finally, real estate firms and commercial banks, both high litigation risk industries, had significantly lower abnormal returns when those industries suffered economic set-backs.
Keywords/Search Tags:Litigation, Firms, Audit quality, Lower abnormal returns, Share price reactions, Insurance
PDF Full Text Request
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