Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used Against You
29 Pages Posted: 28 May 2017
Date Written: April 25, 2017
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: Suggested Citation