The Timeliness of Bad Earnings News and Litigation Risk

44 Pages Posted: 18 Jul 2010 Last revised: 1 Jun 2012

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

John M. McInnis

University of Texas at Austin - Department of Accounting

Richard Mergenthaler

The University of Arizona - Eller College of Management

Yong Yu

University of Texas at Austin

Date Written: May 31, 2012

Abstract

This study investigates whether the timely revelation of bad earnings news is associated with a lower incidence of litigation. The timeliness of earnings news is captured by a new measure based on the evolution of the consensus analyst earnings forecast. Holding total bad earnings news and other determinants of litigation constant, we find that earlier revelation of bad earnings news lowers the likelihood of litigation. This result holds for both settled and dismissed lawsuits. Further, we reconcile our findings with prior work that measures timeliness using managerial warnings via press releases. These tests suggest our findings are attributable to the ability of our timeliness measure to capture bad earning news revealed through disclosure channels beyond press releases.

Keywords: Securities litigation, disclosure, analyst forecasts, earnings news

JEL Classification: K22, K41, M41

Suggested Citation

Donelson, Dain C. and McInnis, John M. and Mergenthaler, Richard Dean and Yu, Yong, The Timeliness of Bad Earnings News and Litigation Risk (May 31, 2012). Accounting Review, Forthcoming, McCombs Research Paper Series No. IROM-08-10, Available at SSRN: https://ssrn.com/abstract=1641342 or http://dx.doi.org/10.2139/ssrn.1641342

Dain C. Donelson (Contact Author)

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Dean Mergenthaler

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

Yong Yu

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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