Abstract

http://ssrn.com/abstract=1872068
 
 

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Market-Based Regulation: Does Securities Litigation Prevent Financial Misrepresentations


Justin Hopkins


University of Virginia – Darden Graduate School of Business Administration

August 23, 2013


Abstract:     
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, M41

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Date posted: July 7, 2011 ; Last revised: December 14, 2013

Suggested Citation

Hopkins, Justin, Market-Based Regulation: Does Securities Litigation Prevent Financial Misrepresentations (August 23, 2013). Available at SSRN: http://ssrn.com/abstract=1872068 or http://dx.doi.org/10.2139/ssrn.1872068

Contact Information

Justin Hopkins (Contact Author)
University of Virginia – Darden Graduate School of Business Administration ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
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