Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News
Management Science, Forthcoming
41 Pages Posted: 29 Jan 2014 Last revised: 30 Jun 2016
Date Written: May 31, 2014
This study finds that large market-wide declines in stock prices are associated with higher litigation incidence and settlements even though market-wide events are legally irrelevant. The probability of litigation nearly doubles (from 0.29% to 0.55%), and the amount of settlements also doubles (from $5.0 million to $10.1 million) when earnings disclosures occur during a large market decline, even after controlling for the firm’s market-adjusted return. Further, judges with (without) specialized experience in securities litigation are more (less) likely to dismiss cases triggered by disclosures during large market declines. This pattern is consistent with experienced judges recognizing and dismissing weaker cases. Finally, managers are less likely to disclose adverse news at the end of trading days with large market declines. While we cannot definitively identify the motive behind this pattern, it is consistent with managers recognizing increased litigation risk during large market declines.
Keywords: Earnings Disclosure, Securities Litigation, Market Returns
JEL Classification: M41, K22
Suggested Citation: Suggested Citation