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Management Forecasts and Litigation Risk
Stephen Brown University of Maryland - Department of Accounting & Information Assurance Stephen A. Hillegeist INSEAD Kin Lo University of British Columbia - Sauder School of Business April 2005 Sauder School of Business Working Paper Abstract: We examine the influence of the ex ante risk of class action securities litigation on firms' decisions to issue management earnings forecasts as well as the characteristics of those forecasts. We find that litigation risk is positively associated with the likelihood of issuing a forecast for both good- and bad-news firms. While the association is marginally stronger for firms with bad earnings news, our results suggest that litigation risk is unlikely to explain the observed preponderance of bad-news forecasts. We examine the effect of litigation risk on the amount of the total earnings news released in the forecast, on forecast horizon, and on forecast precision. These results indicate that higher litigation risk is associated with a higher proportion of news being released when firms have bad news. Finally, higher litigation risk is associated with forecasts being released earlier and being more precise.
Keywords: Management forecasts, litigation risk, forecast news, forecast precision, forecast horizon JEL Classifications: M10, M41, M45, K22 Working Paper SeriesDate posted: May 02, 2005 ; Last revised: August 24, 2005Suggested CitationContact Information
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