ABSTRACT: We study the effects of cross‐listings on audit fees. We first develop a model in which legal environments play a crucial role in determining the auditor's legal liability. Our model and analysis predict that auditors charge higher fees for firms that are cross‐listed in countries with stronger legal regimes than they do for non‐cross‐listed firms and that the cross‐listing audit fee premium increases with the difference in the strength of legal regimes between the cross‐listed foreign country and the home country. We then empirically test these predictions. The results of our cross‐country regressions strongly support our predictions. In addition, we find no significant cross‐listing fee premium for firms that are cross‐listed in countries whose legal regimes are. no stronger than those of their home countries. This suggests that cross‐listing audit fee premiums are associated with increased legal liability and not with increased audit complexity per se. Our findings help explain why cross‐listing premiums occur and what determines their magnitude.

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