Does the Threat of Private Litigation Increase the Usefulness of Reported Earnings? International Evidence
Inder K. Khurana
University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business
University of Texas at San Antonio
Texas A&M University
June 16, 2010
Journal of International Accounting Research, Vol. 5, No. 2, pp. 21-40, Fall 2006
In this cross-border study, we document the usefulness of reported earnings as conditioned by varying levels of litigation risk. We focus on litigation risk, since Ball (2001) suggests that although litigation rights are seldom discussed in the context of international accounting, the threat of private litigation can motivate corporate insiders to increase transparency in financial reporting. We operationalize the quality of reported earnings based on their ability to predict the firm's future cash flows. The focus on future cash flows enables us to examine the usefulness of reported earnings without having to assume pricing similarities across stock markets. We examine the relation between litigation risk and earnings quality for firms in a sample of 34 countries. We find that the higher the litigation threat, the greater the predictive ability of reported earnings for future cash flows.
Keywords: Litigation risk, Earnings quality, Investor protection, Cross-border analysis
JEL Classification: K22, M41, M43, M47Accepted Paper Series
Date posted: September 20, 2006 ; Last revised: June 16, 2010
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