Securities Law Precedents, Legal Liability, and Financial Reporting Quality
Review of Finance, Forthcoming
87 Pages Posted: 31 Oct 2022 Last revised: 31 Aug 2023
Date Written: August 28, 2023
In common law systems, firms’ litigation risk depends both on written laws and how courts interpret these laws. Using 321 U.S. circuit court rulings, we introduce a novel measure capturing courts’ attitudes towards defendants in securities lawsuits. Our results confirm that financial misreporting firms in more defendant-friendly circuits face fewer lawsuits. Consistent with lower expected litigation costs, firms in these circuits face less negative market reactions when misreporting is revealed, invest less in preventing misreporting, and are more likely to engage in aggressive misreporting. We conclude that defendant-friendly precedents reduce firms’ legal liability and worsen their financial reporting quality.
Keywords: securities litigation, case law, precedents, legal liability, financial reporting quality
JEL Classification: G14, K22, K40, M41
Suggested Citation: Suggested Citation