Spillover Effects in Disclosure-Related Securities Litigation

The Accounting Review, Vol. 97 (5), pp. 275-299, September 2022

49 Pages Posted: 22 Oct 2019 Last revised: 29 Sep 2022

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Rachel W. Flam

London Business School

Christopher G. Yust

Texas A&M University

Date Written: November 1, 2019

Abstract

Securities litigation is relatively rare but can significantly affect sued firms. We extend this research by examining the spillover effect of securities litigation on industry peers using a sample of disclosure-related litigation—distinct from events such as restatements and SEC enforcement. We find investors respond immediately as peers exhibit negative abnormal returns before and after case filings. Additionally, peers provide more voluntary earnings and sales forecasts. Notably, investors and peers respond primarily to cases that eventually settle, where litigation costs are concentrated. Further, disclosure results are concentrated in growth firms, where voluntary disclosure is most important, and in low litigation industries, where litigation is more noteworthy. Peers also adjust attributes of mandatory disclosures: disclosures become shorter, more readable, and contain fewer litigation-related terms. These changes appear successful as peers have lower future litigation incidence. Collectively, our findings indicate securities litigation has significant effects beyond the firms that directly face litigation.

Keywords: Securities Litigation; Peer Firm Spillover; Forecasts; Disclosure

JEL Classification: D82, G30, H26, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Flam, Rachel W. and Yust, Christopher, Spillover Effects in Disclosure-Related Securities Litigation (November 1, 2019). The Accounting Review, Vol. 97 (5), pp. 275-299, September 2022, Available at SSRN: https://ssrn.com/abstract=3467869 or http://dx.doi.org/10.2139/ssrn.3467869

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Rachel W. Flam

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Christopher Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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