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The Timeliness of Bad Earnings News and Litigation RiskDain C. DonelsonUniversity of Texas at Austin - McCombs School of Business John M. McInnisUniversity of Texas at Austin - Department of Accounting Richard Mergenthaler Jr.University of Iowa - Henry B. Tippie College of Business Yong YuUniversity of Texas at Austin May 31, 2012 Accounting Review, Forthcoming McCombs Research Paper Series No. IROM-08-10 Abstract: This study investigates whether the timely revelation of bad earnings news is associated with a lower incidence of litigation. The timeliness of earnings news is captured by a new measure based on the evolution of the consensus analyst earnings forecast. Holding total bad earnings news and other determinants of litigation constant, we find that earlier revelation of bad earnings news lowers the likelihood of litigation. This result holds for both settled and dismissed lawsuits. Further, we reconcile our findings with prior work that measures timeliness using managerial warnings via press releases. These tests suggest our findings are attributable to the ability of our timeliness measure to capture bad earning news revealed through disclosure channels beyond press releases.
Number of Pages in PDF File: 44 Keywords: Securities litigation, disclosure, analyst forecasts, earnings news JEL Classification: K22, K41, M41 working papers seriesDate posted: July 18, 2010 ; Last revised: June 1, 2012Suggested CitationContact Information
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