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

50 Pages Posted: 12 Nov 2019 Last revised: 17 Dec 2019

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

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

Clemson University - Department of Finance

Date Written: November 1, 2019

Abstract

We hypothesize that firms’ attempts to reduce litigation risk can worsen financial report readability: as firms strive for disclosure accuracy and thoroughness, reports increase in size and complexity. Readability deteriorates with management exposure to securities class actions at the current firm or at another firm connected through, for instance, a board interlock or prior employment. Using an SEC rule change as an exogenous shock, we show adjustments to readability can moderate firm litigation risk. Furthermore, firms respond to exogenous shifts in the information environment, e.g., the impact of brokerage mergers on analyst following, by adjusting readability as circumstances warrant.

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

JEL Classification: G30, G38, K22

Suggested Citation

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? (November 1, 2019). 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

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

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States

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