Litigation Risk and Audit Pricing: The Role of Public Equity
Coauthor(s): Brad Badertscher, Bjorn Jorgensen, William Kinney.
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Does de facto audit litigation risk arising from regulatory and market factors for U.S. public equity firms affect audit pricing? The answer is important for evaluating efficiency of regulatory regime design and for understanding audit production economics. For U.S. firms with publicly-traded debt, we hold constant the regulatory regime, including issuer reporting mandates and auditor responsibilities, but partition those with public equity and otherwise similar private equity firms and thus vary market factors and de facto litigation risk. In cross-section, we find that public equity firms' fees are 16% to 25% higher than private firms'. Results are consistent with higher audit litigation risk arising from public equity ownership due to readily available equity prices to quantify potential damage claims imposing substantial incremental audit fees. Time-series comparisons for firms that change ownership status yield qualitatively similar fee decreases for going-private firms and significantly larger fee increases for going-public firms.
Badertscher, Brad, Bjorn Jorgensen, Sharon Katz, and William Kinney. "Litigation Risk and Audit Pricing: The Role of Public Equity." Columbia Business School, 2013.