Does Court Stringency Affect Restatement Decisions?

Posted: 4 Sep 2020

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

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 how heterogeneous pleading standards among courts affect firms’ propensity for making voluntary restatements. We find robust evidence that misreporting firms headquartered in court jurisdictions with higher dismissal rates (more lenient to firms) are more likely to make voluntary restatements. Using the U.S. Supreme Court’s Tellabs decision as an exogenous shock to the pleading standard in some district courts, we find similar evidence in a difference-in-differences analysis. Our findings, that firms are more likely to admit misreporting when the legal environment is lenient, cannot be inferred from previous research, which suggests that firms disclose bad news when facing high litigation risk. Thus, we provide new evidence on the complex relationship between the legal environment and financial reporting decisions.

Keywords: Private Securities Litigation, Pleading Standard, Accounting Misreporting, Restatement

JEL Classification: M41; K22; G39

Suggested Citation

Cheng, C.S. Agnes and Huang, Henry and Lei, Zhen and Lu, Haitian, Does Court Stringency Affect Restatement Decisions? (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661651

C.S. Agnes Cheng

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

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

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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