Abstract

http://ssrn.com/abstract=2034539
 


 



Auditors' Liability, Investments, and Capital Markets: A Potential Unintended Consequence of the Sarbanes-Oxley Act


Mingcherng Deng


CUNY Baruch College

Nahum D. Melumad


Columbia Business School - Accounting, Business Law & Taxation

Toshi Shibano


Columbia Business School

April 4, 2012

Journal of Accounting Research, Forthcoming

Abstract:     
To restore investors' confidence in the reliability of corporate financial disclosures, the Sarbanes-Oxley Act of 2002 mandated stricter regulations and arguably increased auditors' liability. In this paper, we analyze the effects of increased auditor liability on the audit failure rate, the cost of capital, and the level of new investment. We focus on a setting in which, with imperfect auditing, a firm has better information than investors about its prospects and seeks to raise capital for new investments in a lemons market. The equilibrium analysis derives corporate reporting and investing choices by the firm, attestation opinions by the auditor, and valuation by rational investors. Three empirically testable predictions emerge: although increasing auditor liability decreases the audit failure rate and the cost of capital for new projects, it also decreases the level of new profitable investments.

Number of Pages in PDF File: 54

Keywords: Auditing, audit liability, information asymmetry, capital market

JEL Classification: M49, G31, G38

Accepted Paper Series


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Date posted: April 8, 2012 ; Last revised: April 11, 2012

Suggested Citation

Deng, Mingcherng and Melumad, Nahum D. and Shibano, Toshi, Auditors' Liability, Investments, and Capital Markets: A Potential Unintended Consequence of the Sarbanes-Oxley Act (April 4, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2034539

Contact Information

Mingcherng Deng (Contact Author)
CUNY Baruch College ( email )
One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
Nahum D. Melumad
Columbia Business School - Accounting, Business Law & Taxation ( email )
3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

Toshi Shibano
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
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