Information Bundling and Securities Litigation
53 Pages Posted: 15 Jun 2016 Last revised: 28 Nov 2016
Date Written: November 26, 2016
We examine two distinct forms of information bundling that can occur when a firm releases a restatement: “positive bundling,” the release of good news with the restatement, and “negative bundling,” the release of additional bad news. We use a triple differences testing approach to exploit the exogenous shock of a 2005 U.S. Supreme Court decision that heightened the loss causation requirements in securities class actions to examine how information bundling affects litigation risk and outcomes. We find that positive bundling offsets the stock decline at the restatement announcement, and significantly reduces the likelihood of litigation. In contrast, negative bundling magnifies the stock price decline accompanying a restatement, but makes litigation less attractive, by confounding the evidence about which piece of bad news caused the decline. On average, non-bundled restatements are 5.94 times more likely to result in litigation compared to bundled restatements in our set of treatment firms. Among restatements that lead to lawsuits, bundled restatements are 8.17 times more likely to be dismissed and are associated with approximately $20 to $24 million lower average settlement amounts.
Keywords: strategic information disclosure, class-action securities lawsuits, litigation risk, earnings restatements
JEL Classification: K22, K41, G14, M41
Suggested Citation: Suggested Citation