Does the Threat of Securities Litigation Deter Earnings Management?
University of Virginia – Darden Graduate School of Business Administration
June 10, 2014
This paper investigates the effects on financial reporting practices of a court ruling that made it easier for public corporations to defend against class-action litigation filed under securities laws. I find an increase in restatements and discretionary revenues for firms affected by the ruling relative to unaffected firms. Further, within affected firms, these results were concentrated among those most likely to face litigation. I also find a decline in debt covenant violations and an increase in investment levels. These results suggest that the threat of shareholder litigation can discipline managerial reporting practices.
Number of Pages in PDF File: 58
Keywords: misrepresentation, restatements, discretionary revenues, regulation, class action lawsuits
JEL Classification: K20, K22, K40, K41, K42, M41
Date posted: July 7, 2011 ; Last revised: June 17, 2014