Legal Liabilities, Audit Accuracy and the Market for Audit Services

摘要: In quality-differentiated audit markets with client-firms of unknown types, insider-managers client firms strategically select auditors who respond to legal liabilities decide their care level. this signaling game, uninformed-investors use the report and auditors' identity for firm valuation. The analysis shows that increased liability increases auditor's effort accuracy but reduces demand high quality auditing because, apart from costs, adverse selection benefit worse type accuracy. Furthermore, alternative regimes damage allocation rules alter informational efficiency financial market.