Does Court Stringency Affect Restatement Decisions?

Posted: 4 Sep 2020

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 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, 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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
235
PlumX Metrics