Fair Value Accounting Standards and Securities Litigation

46 Pages Posted: 18 Apr 2022

See all articles by Musaib Ashraf

Musaib Ashraf

Michigan State University - Eli Broad College of Business

Dain C. Donelson

University of Iowa

John M. McInnis

University of Texas at Austin - Department of Accounting

Richard Mergenthaler

Penn State University

Date Written: March 2022

Abstract

We investigate the effect of fair value accounting standards on firms’ litigation risk. Commentators claim the discretion required by fair value standards allows plaintiffs to “second guess” managers’ judgments. However, fair value standards and their underlying transactions are complex, making it difficult for plaintiffs to allege the defendant intentionally misled investors. Consistent with this argument, we find firms that rely more on fair value standards are less likely to be sued. We also find firms with material restatements involving fair value violations are less likely to be sued for the restatement than are firms with material restatements involving non-fair-value GAAP violations. In targeted difference-in-differences tests, we find no evidence of a change in litigation risk after new fair value standards are passed (in the areas covered by the specific standards). Overall, our results suggest that fair value standards are a relatively low litigation risk area in GAAP.

Keywords: Fair Value Standards, Securities Litigation

JEL Classification: M41, G3, K4

Suggested Citation

Ashraf, Musaib and Donelson, Dain C. and McInnis, John M. and Mergenthaler, Richard Dean, Fair Value Accounting Standards and Securities Litigation (March 2022). Available at SSRN: https://ssrn.com/abstract=4060405 or http://dx.doi.org/10.2139/ssrn.4060405

Musaib Ashraf

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Dean Mergenthaler (Contact Author)

Penn State University ( email )

University Park, PA 16802-3306
United States

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