Auditor Litigation Risk and Corporate Investments

We investigate the effect of auditor litigation risk on firm-level investment. Exploiting the staggered increase in third-party auditor legal liability in US states as an exogenous shock, we find that increased risk of auditor litigation leads to an increase in corporate investments. This effect holds true for both investment in fixed assets and investment in labour. Firms in states with increased auditor litigation risk are also more efficient in their investment in fixed assets and labour. Overall, our results, which withstand several robustness checks, show that the effects of auditor litigation risk transcend both corporate financial reporting and financing decisions