Do auditors price litigious tone?

AbstractWe investigate whether audit fees are shaped by litigious tone. Using a sample of listed firms in the US, we find litigious tone in 10‐K reports is associated with higher audit fees. This finding remains robust when we account for sample selection bias, firm‐level unobserved heterogeneity effects, endogeneity concerns, or when subsections in 10‐K reports are analysed. In addition, we document the relationship is of a lower magnitude among high‐risk client firms, suggesting that auditors are already cautious when auditing high‐risk clients. This suggests that auditors rely less on litigious tone in determining audit fees when faced with high‐risk clients.