Shareholder Litigation and Conservative Accounting: Evidence from Universal Demand Laws

The Accounting Review, Forthcoming. https://doi.org/10.2308/TAR-2017-0097

49 Pages Posted: 19 Nov 2020

See all articles by Hariom Manchiraju

Hariom Manchiraju

Indian School of Business (ISB), Hyderabad

Vivek Pandey

University of Southern California - Marshall School of Business

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Date Written: April 2020

Abstract

We use the staggered adoption of the Universal Demand Laws (UD Laws) to examine the effect of an exogenous reduction in shareholders' ability to litigate on the extent of accounting conservatism. On average, we find an increase in reporting conservatism post UD. The increased conservatism is concentrated in firms contemplating equity issuance, with high proportion of monitoring investors, and high corporate governance quality. In contrast, firms with specific short-term incentives for aggressive accounting, such as those narrowly beating benchmarks, those with abnormal insider trading and those likely to violate debt covenants, weakly governed firms, and firms with high ex ante litigation risk decrease reporting conservatism after UD. Our results suggest that the relation between the litigation environment and reporting conservatism is complex and dependent on specific characteristics and unique circumstances of the firms.

Suggested Citation

Manchiraju, Hariom and Pandey, Vivek and Subramanyam, K.R., Shareholder Litigation and Conservative Accounting: Evidence from Universal Demand Laws (April 2020). The Accounting Review, Forthcoming. https://doi.org/10.2308/TAR-2017-0097, Available at SSRN: https://ssrn.com/abstract=3703468 or http://dx.doi.org/10.2139/ssrn.3703468

Hariom Manchiraju

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Vivek Pandey (Contact Author)

University of Southern California - Marshall School of Business ( email )

Los Angeles, CA
United States

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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