Of Fogs and Bogs: Does Litigation Risk Make Financial Reports Less Readable?

65 Pages Posted: 12 Nov 2019 Last revised: 8 Apr 2024

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Yun Liu

Claremont Colleges - Keck Graduate Institute

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics

Minxing Sun

University of North Georgia

Date Written: April 5, 2024

Abstract

We predict that firms’ attempts to reduce litigation risk can inadvertently worsen financial report readability by increasing reports’ size, complexity, and altering their linguistic characteristics. We find that litigation risk reduces report readability. Readability worsens after firms experience a securities class action. This persists for several years after lawsuit resolution. To alleviate endogeneity concerns, we show that the litigation experience of a firm’s managers and directors at other firms impacts readability. We also find that firms adjust readability around litigation flashpoints. Using an SEC rule change as an exogenous shock, we show that adjustments to readability can moderate firm litigation risk.

Keywords: Readability, Transparency, Securities Class Actions, Litigation Risk, Plain English Rule

JEL Classification: G30, G38, K22

Suggested Citation

Humphery-Jenner, Mark and Humphery-Jenner, Mark and Liu, Yun and Nanda, Vikram K. and Silveri, Sabatino and Sun, Minxing, Of Fogs and Bogs: Does Litigation Risk Make Financial Reports Less Readable? (April 5, 2024). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3478994 or http://dx.doi.org/10.2139/ssrn.3478994

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Yun Liu

Claremont Colleges - Keck Graduate Institute ( email )

535 Watson Drive
Claremont, CA 91711
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Sabatino Silveri

University of Memphis - Fogelman College of Business and Economics ( email )

3675 Central Avenue
Memphis, TN 38152
United States

Minxing Sun

University of North Georgia ( email )

Gainesville, GA 30566
United States

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