Litigation risk, accounting quality, and investment efficiency
- Authors
- Chung, H.H.; Wynn, J.P.; Yi, H.
- Issue Date
- 2013
- Keywords
- Accruals quality; Directors' & officers' (D& O) liability insurance; Investment cash flow sensitivity; Investment efficiency; Litigation risk
- Citation
- Advances in Accounting, v.29, no.2, pp.180 - 185
- Indexed
- SCOPUS
- Journal Title
- Advances in Accounting
- Volume
- 29
- Number
- 2
- Start Page
- 180
- End Page
- 185
- URI
- https://scholar.korea.ac.kr/handle/2021.sw.korea/106040
- DOI
- 10.1016/j.adiac.2013.09.009
- ISSN
- 0882-6110
- 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. © 2013 Elsevier Ltd.
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