Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used Against You

29 Pages Posted: 28 May 2017

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: April 25, 2017

Abstract

Investment analysts require information on potential losses from contingent liabilities such as litigation expenses. However, revelation of the firm’s private estimates of the probability of loss and possible legal damages can be detrimental to the firm by encouraging litigation and increasing the costs of settlement. Using a model of rational noisy information disclosure, I propose an accounting regulatory disclosure model that uses publicly-available data to provide noisy, but useful estimates of litigation damages without requiring full disclosure of sensitive private information about the firm’s assessment of litigation merits. However, a collective action constraint prevents firms from voluntarily utilizing this information-enhancing solution without regulation to coordinate accounting disclosure requirements.

Keywords: Contingent liabilities, litigation damages, accounting disclosure

JEL Classification: M41, K41, G30

Suggested Citation

Allen, Linda, Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used Against You (April 25, 2017). Available at SSRN: https://ssrn.com/abstract=2974342 or http://dx.doi.org/10.2139/ssrn.2974342

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

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