Shareholder Litigation and Readability in Financial Disclosures: Evidence from a Natural Experiment
47 Pages Posted: 18 Jun 2019 Last revised: 17 Jun 2020
Date Written: June 16, 2020
We use a natural experiment to weigh conflicting theories on the causal impact of shareholder litigation threat on the readability of corporate financial disclosures. In response to a 1999 Ninth Circuit Court of Appeals ruling that caused an unexpected reduction in litigation risk, we find that consistent with a full-disclosure hypothesis, firms headquartered in the Ninth Circuit significantly improved the readability of their financial disclosures relative to control firms. Our results are robust to different linguistic complexity measures, matching techniques, empirical specifications, multidimensional fixed effects that control for both time-invariant and time-varying unobservable confounders, and an alternative natural experiment.
Keywords: Securities litigation risk, Disclosure, Textual analysis, Fintech, Endogeneity
JEL Classification: G32, G38, K22, K40
Suggested Citation: Suggested Citation