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

See all articles by Dain C. Donelson

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Justin Hopkins

University of Virginia - Darden School of Business

Date Written: May 31, 2014

Abstract

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

Donelson, Dain C. and Hopkins, Justin, Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News (May 31, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2386099 or http://dx.doi.org/10.2139/ssrn.2386099

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

Justin Hopkins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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