Conservative Reporting and Securities Class Action Lawsuits

57 Pages Posted: 16 Aug 2012 Last revised: 9 Oct 2015

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Ying (Julie) Huang

University of Louisville

Weining Zhang

Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2014

Abstract

Positive accounting theory predicts that conservative financial reporting averts GAAP-based litigation. However, very little empirical evidence addresses whether and how accounting conservatism provides these benefits. Using a sample of lawsuits against public companies for alleged violations of US GAAP, we examine the association of accounting conservatism with subsequent initiation of lawsuits and with four litigation outcomes: market reactions to lawsuits, duration of lawsuits, dismissals of lawsuits, and penalties approved by courts. We find that firms with greater degrees of conditional conservatism experience more favorable consequences on all five dimensions of litigation occurrence and outcomes. Two measures of unconditional conservatism are not associated with the litigation variables. Our study provides new empirical evidence supporting Watts’ (2003a) litigation explanation for accounting conservatism.

Keywords: accounting conservatism, litigation, lawsuit dismissal, lawsuit settlement

JEL Classification: M41

Suggested Citation

Ettredge, Michael and Huang, Ying (Julie) and Zhang, Weining, Conservative Reporting and Securities Class Action Lawsuits (November 24, 2014). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference; Accounting Horizons, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2129800 or http://dx.doi.org/10.2139/ssrn.2129800

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Ying Huang (Contact Author)

University of Louisville ( email )

School of Accountancy
College of Business
Louisville, KY KY Kentucky 40292
United States
5028521647 (Phone)
5028521647 (Fax)

HOME PAGE: http://www.linkedin.com/in/ying-julie-huang-02093769

Weining Zhang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/FacultyResearch/Faculty/Accounting/ZhangWeining.aspx

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