Market-Based Regulation: Does Securities Litigation Prevent Financial Misrepresentations
University of Virginia – Darden Graduate School of Business Administration
August 23, 2013
Ascertaining whether markets can self-regulate by preventing managerial abuses is a challenge because market discipline and managerial behavior are estimated jointly. To get around this identification issue, this paper exploits two exogenous shocks to legal standards that govern class-actions filed against U.S. firms. In a difference-in-differences framework, I analyze the propensity of firms affected by said shocks to issue financial restatements relative to firms unaffected by the shocks. Overall, more stringent legal standards, reducing the risk and cost of future litigation, leads to an increase in restatements while less stringent legal standards leads to a decline in restatements. These results suggest that markets can self-regulate and prevent financial misrepresentations through shareholder litigation.
Number of Pages in PDF File: 49
Keywords: misrepresentation, restatements, discretionary revenues, regulation, class action lawsuits
JEL Classification: K20, K22, K40, K41, K42, M41working papers series
Date posted: July 7, 2011 ; Last revised: December 14, 2013
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