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Article: An analysis of the economic consequences of the proportionate liability rule

TitleAn analysis of the economic consequences of the proportionate liability rule
Authors
Issue Date1998
PublisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.html
Citation
Contemporary Accounting Research, 1998, v. 15 n. 4, p. 457-480 How to Cite?
AbstractMajor accounting firms in the United States have singled out elimination of joint and several liability as one of the most needed legal reforms in the country. The recent legislation of the Private Securities Litigation Reform Act of 1995 replaced joint and several liability with proportionate liability. This paper develops a simple model to analyze the economic consequences of such a change in the legal environment facing public accountants. In particular, we examine the incentive effects induced by the proportionate liability rule on the auditor's effort and financial statement users' litigation decisions. Our analysis demonstrates that replacing joint and several liability with proportionate liability can decrease the equilibrium audit effort, lawsuit probability, market price of the firm, and audit fee. More important, even though the proportionate liability rule reduces the equilibrium audit effort, we show that it can actually increase social welfare.
Persistent Identifierhttp://hdl.handle.net/10722/177821
ISSN
2015 Impact Factor: 1.782
2015 SCImago Journal Rankings: 2.594
SSRN
References

 

DC FieldValueLanguage
dc.contributor.authorChan, DKen_US
dc.contributor.authorPae, Sen_US
dc.date.accessioned2012-12-19T09:40:28Z-
dc.date.available2012-12-19T09:40:28Z-
dc.date.issued1998en_US
dc.identifier.citationContemporary Accounting Research, 1998, v. 15 n. 4, p. 457-480en_US
dc.identifier.issn0823-9150en_US
dc.identifier.urihttp://hdl.handle.net/10722/177821-
dc.description.abstractMajor accounting firms in the United States have singled out elimination of joint and several liability as one of the most needed legal reforms in the country. The recent legislation of the Private Securities Litigation Reform Act of 1995 replaced joint and several liability with proportionate liability. This paper develops a simple model to analyze the economic consequences of such a change in the legal environment facing public accountants. In particular, we examine the incentive effects induced by the proportionate liability rule on the auditor's effort and financial statement users' litigation decisions. Our analysis demonstrates that replacing joint and several liability with proportionate liability can decrease the equilibrium audit effort, lawsuit probability, market price of the firm, and audit fee. More important, even though the proportionate liability rule reduces the equilibrium audit effort, we show that it can actually increase social welfare.en_US
dc.languageengen_US
dc.publisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.htmlen_US
dc.relation.ispartofContemporary Accounting Researchen_US
dc.titleAn analysis of the economic consequences of the proportionate liability ruleen_US
dc.typeArticleen_US
dc.identifier.emailChan, DK: dkchan@hkucc.hku.hken_US
dc.identifier.authorityChan, DK=rp01046en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.scopuseid_2-s2.0-0009197140en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-0009197140&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume15en_US
dc.identifier.issue4en_US
dc.identifier.spage457en_US
dc.identifier.epage480en_US
dc.publisher.placeCanadaen_US
dc.identifier.ssrn164455-
dc.identifier.scopusauthoridChan, DK=7402216890en_US
dc.identifier.scopusauthoridPae, S=6701609709en_US

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