The Local Spillover Effect of Marijuana Liberalization: Evidence From Material Misstatements

This study documents an organizational spillover effect of marijuana liberalization on corporate financial reporting quality. Exploiting the staggered adoption of state‐level medical marijuana legalization (MML) laws, we find that firms headquartered in states adopting MMLs experience a higher likelihood of material misstatements. Additional analyses provide suggestive evidence that accounting staff turnover increases following MML adoption, which may contribute to a higher likelihood of internal control failures and, in turn, financial misstatements. We also find that the subsequent legalization of recreational marijuana is associated with a further increase in the likelihood of material misstatements beyond the effect of MMLs alone. Collectively, these findings suggest that the effects of marijuana legalization extend beyond individual consumption behaviour to influence organizational environments and the monitoring conditions underlying corporate financial reporting.