The Timeliness of Bad Earnings News and Litigation Risk
Dain C. Donelson
University of Texas at Austin - McCombs School of Business
John M. McInnis
University of Texas at Austin - Department of Accounting
Richard Mergenthaler Jr.
University of Iowa - Henry B. Tippie College of Business
University of Texas at Austin
May 31, 2012
Accounting Review, Forthcoming
McCombs Research Paper Series No. IROM-08-10
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.
Number of Pages in PDF File: 44
Keywords: Securities litigation, disclosure, analyst forecasts, earnings news
JEL Classification: K22, K41, M41
Date posted: July 18, 2010 ; Last revised: June 1, 2012