Director Liability Protection, Earnings Management, and Audit Pricing

Abstract

We examine how a firm's director liability protection is related to earnings management and audit pricing. Firms whose directors are protected from litigation either by state laws or through clauses in the firm's charter have significantly more accruals management. This relation is significant after the passage of the Sarbanes‐Oxley Act but not before. We also find evidence of a positive association between director protection and auditor fees. The results are robust to a number of alternative specifications, including one that instruments for director liability protection.