Ex Ante Litigation Risk and Firm Restatement Decisions: Evidence from District Courts

Posted: 4 Sep 2020 Last revised: 5 Oct 2022

See all articles by Agnes Cheng

Agnes Cheng

Hong Kong Polytechnic University; University of Oklahama

Henry He Huang

Yeshiva University - Sy Syms School of Business

Zhen Lei

Hong Kong Polytechnic University - School of Accounting and Finance

Haitian Lu

Hong Kong Polytechnic University

Date Written: July 27, 2020

Abstract

This study examines whether ex ante securities litigation risk prompts firms to make more or less voluntary restatements. The litigation risk is captured by a new measure based on the dismissal rate of the district court where the firm is headquartered. We find that misreporting firms headquartered in lenient (high dismissal rate) court jurisdictions are more likely to make voluntary restatements. Using the U.S. Supreme Court’s Tellabs decision as an exogenous shock that reduces the leniency of some district courts, we find robust evidence that higher litigation risk decreases managers’ incentives to admit their misreporting. Our finding sheds new light on the litigation risk-voluntary disclosure paradox by pointing to a positive aspect of court leniency in motivating self-policing behavior such as restatement.

Keywords: Private Securities Litigation, court dismissal rate, Pleading Standard, Accounting Misreporting, Restatement

JEL Classification: M41; K22; G39

Suggested Citation

Cheng, Agnes and Huang, Henry and Lei, Zhen and Lu, Haitian, Ex Ante Litigation Risk and Firm Restatement Decisions: Evidence from District Courts (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661651

Agnes Cheng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

University of Oklahama ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States

Zhen Lei

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Haitian Lu

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

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