This paper examines the effects of a decrease in auditor litigation risk in a setting that isolates a change in auditor litigation risk from changes in auditor reputation. _StoneRidge Investment Partners v. Scientific Atlanta_ is a 2008 U.S. Supreme Court ruling that restricted secondary actor liability in class action suits, resulting in a decrease in class actions that listed auditors as defendants. We document that the _StoneRidge_ decision is associated with a negative CAR for clients of Big 4 auditors and (...) industry specialist auditors, in particular those associated with high-litigation risk, low cash, and past incidences of modified going concern opinions. These findings are consistent with investor perception of lower potential payoffs from secondary defendants in class action suits, in particular auditors, following the _StoneRidge_ decision. We also document that auditors are more (less) likely to accept (reject) risky clients and charge lower audit fees to risky clients after _StoneRidge_, consistent with a decrease in auditor litigation risk that increases auditor risk tolerance. Finally, we provide evidence that audit firms issue fewer going concern opinions following _StoneRidge_, consistent with a decrease in litigation risk leading to lower audit quality_._ Our results are relevant to policy makers as they consider the disciplinary role of litigation on audit markets. (shrink)

In our study, we examine the association between hedge fund activism and a target firm’s corporate social responsibility (CSR) activities and whether activists can promote socially responsible investments while upholding shareholders’ interests. Using different matched samples, we find a strong positive association between the target firm’s CSR in the year before it is targeted by activists and its probability of being targeted by a hedge fund. Classifying hedge fund activists into socially and non-socially responsible funds based on their objectives, we (...) find that both give similar level of consideration to a firm’s CSR activities when initiating campaigns. Similar to DesJardine and Durand (DesJardine and Durand, Strategic Management Journal 41:1054–1082, 2020), we demonstrate that hedge funds have, on average, a negative impact on target firms’ CSR in the years following the initial investments. Complementary to DesJardine and Durand (DesJardine and Durand, Strategic Management Journal 41:1054–1082, 2020), we compare the two types of hedge funds and find an asymmetric effect of the hedge funds’ campaigns. Socially responsible hedge fund campaigns are associated with a large _increase_ in their target’s CSR, whereas non-socially responsible hedge funds _decrease_ this measure in their target. Finally, we find that target firms exhibit a long-term improvement in future stock returns and profitability. These findings provide evidence that certain types of activists, such as socially responsible funds, promote both _stakeholder_ and _shareholders’_ long-term interests. (shrink)

We study how changes in unemployment risk affect firms’ productivity and whether firm-initiated policies can mitigate the moral hazard problem created by increases in unemployment insurance benefits that might decrease workers’ incentives to work hard. We focus on state-specific changes in UIB levels as a quasi-natural experiment. While a large body of research has examined UIBs, including their effect on unemployed workers, few studies investigate whether UIBs have any impact on a firm’s overall productivity. Using data on firm-level total factor (...) productivity and state-level UIBs, we find a negative association between productivity and UIBs. We also find that the negative association is weaker for firms with higher employee-welfare indices than for firms with lower indices, suggesting that the adverse effect of higher UIBs on productivity is mitigated by policies that benefit workers’ welfare. More specifically, we find that among policies that are under the umbrella of corporate social responsibility, a subset of employee-welfare policies are more effective in managing moral hazard problems than other policies. (shrink)