Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes

53 Pages Posted: 31 Aug 2015 Last revised: 19 Dec 2018

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Sibo Liu

The University of Hong Kong, Faculty of Business and Economics

Lai Wei

Lingnan University - Department of Finance and Insurance

Date Written: December 19, 2018

Abstract

This paper documents that changes in litigation risk affect corporate voluntary disclosure practices. We make causal inferences by exploiting three legal events that generate exogenous variations in firms’ litigation risk. Using a matching-based, fixed-effect difference-indifferences design, we find that the treated firms tend to make fewer (more) management earnings forecasts relative to the control firms when they expect litigation risk to be lower (higher) following the legal event. The results are concentrated on the earnings forecasts conveying negative news and are robust to alternative specifications, samples and outcome variables.

Keywords: earnings forecasts, litigation risk, shareholder protection

JEL Classification: D80, G14, K22, K41, M41

Suggested Citation

Houston, Joel F. and Lin, Chen and Liu, Sibo and Wei, Lai, Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes (December 19, 2018). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2653207 or http://dx.doi.org/10.2139/ssrn.2653207

Joel F. Houston (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Sibo Liu

The University of Hong Kong, Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
Hong Kong

Lai Wei

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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