ریسک شکایت های قانونی، کیفیت حسابداری و بازده سرمایه گذاری

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.

This paper examines the effect of a determinant of litigation risk on the relationship between accounting quality and investment efficiency. Litigation risk mitigates agency problems and promotes greater accounting quality; and greater accounting quality, in turn, enhances capital allocation efficiency (Biddle & Hilary, 2006). Accordingly, factors that might reduce litigation risk can undermine the deterrent effect of litigation risk, inducing opportunistic behaviors by managers, reducing accounting quality and investment efficiency. We argue that directors’ and officers’ (D&O) liability insurance reduces litigation risk, and we examine the association of D&O insurance, accounting quality, and investment efficiency. We exploit a unique institutional setting in Canada, where firms are required to disclose D&O insurance information. We use disclosed D&O coverage limits to measure litigation risk and posit that managers and directors with high abnormal coverage limits face low litigation risk. Under these observable conditions we hypothesize that the relationship between accounting quality and investment efficiency is altered. Consistent with extant evidence, we confirm a negative association between abnormal D&O coverage limits and accruals quality. Moreover, we find that the documented negative association between accounting quality and investment cash flow sensitivity is weaker when abnormal D&O insurance coverage limit is high. Overall, our findings suggest that litigation risk is an important governance mechanism that ensures the quality of accounting information and improves capital allocation efficiency by reinforcing the role of accruals in investment financing decisions. Our findings are robust to alternative measures of accounting quality and investment efficiency. Our research contributes to the literature in the following ways. First, we extend prior research on accruals quality and investment efficiency by documenting that observable risk exposure moderates the association between accounting quality and investment efficiency. Our results highlight the importance of litigation risk in ensuring the quality of accounting information and promoting investment efficiency. Second, we provide evidence on the effects of litigation risk on accruals quality. Prior studies use accounting restatements or earnings conservatism as a proxy for accounting information quality or exploit cross-country differences in legal institutions (Burgstahler et al., 2006, Chung and Wynn, 2008, Kim, 2005, Leuz et al., 2003 and Lin et al., 2013). Our firm-level evidence further underscores the importance of litigation risk even in an environment with a high level of investor protection, such as in Canada. The remainder of the paper is organized as follows. In Section 2, we provide the literature review and the hypothesis development. Section 3 presents the sample selection and describes the research design. Section 4 discusses empirical findings, and Section 5 provides the results of robustness checks. Finally, Section 6 offers concluding remarks.

Using D&O insurance coverage limits of Canadian firms over the period ranging from 1998 to 2008, we provide evidence that (i) observable litigation risk (as measured by abnormal D&O coverage limits) is associated with accruals quality, and (ii) observable litigation risk moderates the facilitating role of accruals quality on investment efficiency. In particular, firms with high abnormal D&O coverage are more likely to provide lower quality accruals, with the effect of a diminished role for accounting quality in promoting investment efficiency. These findings are robust to alternative measures of accruals quality and investment efficiency. This study contributes to the literature by providing firm-level evidence on the effects of litigation risk on accounting quality and investment decisions. Our firm-level evidence further underscores the importance of litigation risk even in an environment with a relatively high level of investor protection, such as in Canada. Moreover, we extend prior research on the association between accruals quality and investment efficiency by reporting that observable litigation risk moderates the association. Our results highlight the importance of litigation risk as a governance mechanism to ensure the quality of accounting information and improve capital allocation efficiency, independently as well as jointly, by reinforcing the role of accounting information in investment decisions.