Spillover Effects in Securities Litigation

44 Pages Posted: 22 Oct 2019 Last revised: 17 Jun 2020

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Rachel W. Flam

Texas A&M University - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: November 1, 2019

Abstract

This study examines the spillover effect of securities litigation. Peers of the sued firm have negative three-day abnormal returns around case filings and continue underperforming over sixty trading days. Peers also improve financial reporting quality and change qualitative disclosure characteristics by providing more readable and positive annual reports while reducing the use of litigation-related terms. Finally, peers increase voluntary earnings guidance but reduce disclosure timeliness and precision. Results are primarily driven by meritorious cases (i.e., those that eventually settle), while nonmeritorious cases have little spillover. These peer changes appear largely successful as they have lower future litigation incidence.

Keywords: Securities Litigation; Financial Reporting; Disclosure; Peer Firm Spillover

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

Suggested Citation

Donelson, Dain C. and Flam, Rachel and Yust, Christopher G., Spillover Effects in Securities Litigation (November 1, 2019). 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 Flam

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States

Christopher G. 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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