Post-litigation reporting conservatism

52 Pages Posted: 28 May 2017 Last revised: 29 Jul 2021

See all articles by Mark Kim

Mark Kim

University of California, Los Angeles - Anderson School of Management

Spencer Pierce

Florida State University - College of Business

Frank Heflin

University of Georgia - J.M. Tull School of Accounting

James Moon

Georgia Institute of Technology - Scheller College of Business

Date Written: July 27, 2021

Abstract

We investigate changes in financial reporting conservatism arising from disclosure-related shareholder lawsuits filed between 1996 and 2016. We find that sued firms respond to 10b-5 litigation with increased accounting conservatism. Consistent with a spillover effect, we also find that non-sued peer firms increase accounting conservatism following litigation. Despite the FASB having eliminated conservatism as an essential qualitative characteristic from the conceptual framework in 2010, we find the post-suit spike in conservatism persists after 2010, suggesting a capital market demand for conservatism even without regulator intervention. Our results, which support the widespread but untested belief that litigation events induce accounting conservatism, extend prior studies examining the disclosure effects of litigation into the accounting choice effects of litigation.

Keywords: Litigation, Conservatism, Network externalities, Peer firm, FASB

JEL Classification: K22, G14, G18, G20, M41

Suggested Citation

Kim, Mark and Pierce, Spencer and Heflin, Frank and Moon, James, Post-litigation reporting conservatism (July 27, 2021). Available at SSRN: https://ssrn.com/abstract=2972155 or http://dx.doi.org/10.2139/ssrn.2972155

Mark Kim

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza D-415
Los Angeles, CA 90095-1481
United States
7738968565 (Phone)

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/kim

Spencer Pierce

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Frank Heflin (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

James Moon

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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