The effect of the private securities Litigation Reform Act of 1995 on the cost of equity capital.: An article from: Quarterly Journal of Finance and Accounting

This digital document is an article from Quarterly Journal of Finance and Accounting, published by University of Nebraska-Lincoln on March 22, 2009. The length of the article is 10108 words. The page length shown above is based on a typical 300-word page. The article is delivered in HTML format and is available immediately after purchase. You can view it with any web browser.

From the author: This study examines how the Private Securities Litigation Reform Act (PSLRA) affects financial information quality, as reflected in firms' cost o f equity capital. We argue that the passage of PSLRA influences the incentives of those involved in the financial reporting process which in turn affects the firms' financial reporting quality. PSLRA replaced joint and several liability with proportionate liability, providing auditing firms with significant relief from litigation. We contend that the reduction in litigation risk for auditors decreased audit quality. PSLRA also made it more difficult for investors to sue firms for fraud which we argue reduces incentives of managers to report information truthfully. Using the cost of equity capital to proxy for financial information quality, we find that the cost of equity capital increases after the enactment of PSLRA, and the increase is more pronounced for clients of Big N auditors and for firms facing high litigation risk.

Citation Details
Title: The effect of the private securities Litigation Reform Act of 1995 on the cost of equity capital.
Author: Ho-Young Lee
Publication:Quarterly Journal of Finance and Accounting (Magazine/Journal)
Date: March 22, 2009
Publisher: University of Nebraska-Lincoln
Volume: 48 Issue: 2 Page: 85(22)

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