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Director Liability Protection, Earnings Management, and Audit Pricing

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  • Sarfraz Khan
  • John K. Wald

Abstract

We examine how a firm's director liability protection is related to earnings management and audit pricing. Firms whose directors are protected from litigation either by state laws or through clauses in the firm's charter have significantly more accruals management. This relation is significant after the passage of the Sarbanes‐Oxley Act but not before. We also find evidence of a positive association between director protection and auditor fees. The results are robust to a number of alternative specifications, including one that instruments for director liability protection.

Suggested Citation

  • Sarfraz Khan & John K. Wald, 2015. "Director Liability Protection, Earnings Management, and Audit Pricing," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 12(4), pages 781-814, December.
    • Handle: RePEc:wly:empleg:v:12:y:2015:i:4:p:781-814
    DOI: 10.1111/jels.12092
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    Cited by:

    1. Omer Berkman & Shlomith D. Zuta, 2020. "The impact of audit committee expertise on auditor resources: the case of Israel," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 579-603, August.
    2. Raghunandan, Aneesh, 2021. "Financial misconduct and employee mistreatment: evidence from wage theft," LSE Research Online Documents on Economics 109863, London School of Economics and Political Science, LSE Library.
    3. Sudipta Basu & Yi Liang, 2019. "Director–Liability–Reduction Laws and Conditional Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 57(4), pages 889-917, September.
    4. Meng-Chi Chueh & Shen-Ho Chang, 2022. "Effects of Directors and Officers Insurance on Earnings Management Strategies: Moderating Role of Restatement Announcements," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 15(1), pages 71-93, July.
    5. Aneesh Raghunandan, 2021. "Financial misconduct and employee mistreatment: Evidence from wage theft," Review of Accounting Studies, Springer, vol. 26(3), pages 867-905, September.
    6. Aguir, Iness & Aguir, Wael, 2020. "Director and officer liability protection and firm value: Unintended consequences," Finance Research Letters, Elsevier, vol. 32(C).

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