Managerial Reporting, Overoptimism, and Litigation Risk

41 Pages Posted: 27 May 2010 Last revised: 21 Jun 2011

See all articles by Volker Laux

Volker Laux

University of Texas at Austin - McCombs School of Business

Phillip C. Stocken

Dartmouth College - Tuck School of Business

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Date Written: May 2011

Abstract

We examine how the threat of litigation affects an entrepreneur’s reporting behavior when the entrepreneur (i) can misrepresent his privately observed information, (ii) pays legal damages out of his own pocket, and (iii) is optimistic about the firm’s prospects relative to investors. We find higher expected legal penalties imposed on the culpable entrepreneur do not always cause the entrepreneur to be more cautious but instead can increase misreporting. We highlight how this relation depends crucially on the extent of entrepreneurial overoptimism, legal frictions, and the internal control environment.

Keywords: Disclosure, Overconfidence, Litigation Risk, Earnings Management

JEL Classification: M46, M40

Suggested Citation

Laux, Volker and Stocken, Phillip C., Managerial Reporting, Overoptimism, and Litigation Risk (May 2011). Tuck School of Business Working Paper No. 2011-87, Available at SSRN: https://ssrn.com/abstract=1616276 or http://dx.doi.org/10.2139/ssrn.1616276

Volker Laux (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

2317 Speedway
Austin, TX Texas 78712
United States

Phillip C. Stocken

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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