Bogging Down Investors: An Unintended Consequence of Litigation Risk

53 Pages Posted: 14 Sep 2019 Last revised: 7 Sep 2022

See all articles by Siwen Fu

Siwen Fu

International Institute of Finance, School of Management, University of Science and Technology of China

Ke Wang

University of Alberta - School of Business

Liandong Zhang

Singapore Management University - School of Accountancy

Liu Zheng

City University of Hong Kong

Date Written: September 6, 2022

Abstract

This study examines the effect of litigation risk on the readability of corporate financial reports using the 1999 Silicon Graphics Inc. court ruling as a quasi-natural experiment. This ruling unexpectedly reduced the litigation risk of firms located in the states of the Ninth Circuit Court (treated firms). We find that the treated firms increase the readability of their financial reports after the ruling, relative to the control firms located in other states. This effect is concentrated in firms prone to shareholder litigation, firms with greater external financing needs, and firms reducing forward-looking disclosures following the ruling. The improvement of readability, however, is muted among firms engaging in earnings management. We also find that the treated firms with low pre-ruling 10-K readability have more informative 10-K reports after the ruling. Collectively, our findings support the notion that litigation risk contributes to low financial reporting readability.

Keywords: Litigation risk, readability, information processing cost, Bog Index, plain English

JEL Classification: D80, G14, M41, K22

Suggested Citation

Fu, Siwen and Wang, Ke and Zhang, Liandong and Zheng, Liu, Bogging Down Investors: An Unintended Consequence of Litigation Risk (September 6, 2022). Available at SSRN: https://ssrn.com/abstract=3447040 or http://dx.doi.org/10.2139/ssrn.3447040

Siwen Fu

International Institute of Finance, School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

Ke Wang (Contact Author)

University of Alberta - School of Business ( email )

3-23 Business Building
Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

Liu Zheng

City University of Hong Kong ( email )

Kowloon Tong
Hong Kong

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