Securities Law Precedents, Legal Liability, and Financial Reporting Quality

87 Pages Posted: 31 Oct 2022 Last revised: 31 Aug 2023

See all articles by Benedikt Franke

Benedikt Franke

University of Würzburg - Business Administration & Economics

Allen H. Huang

Hong Kong University of Science and Technology - Department of Accounting

Reeyarn Zhiyang Li

Paderborn University

Hui Wang

Renmin University of China - School of Business

Date Written: August 28, 2023

Abstract

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

Franke, Benedikt and Huang, Allen H. and Li, Reeyarn Zhiyang and Wang, Hui, Securities Law Precedents, Legal Liability, and Financial Reporting Quality (August 28, 2023). Review of Finance, Forthcoming, TRR 266 Accounting for Transparency Working Paper Series No. 131, HKUST Business School Research Paper No. 2023-117, Available at SSRN: https://ssrn.com/abstract=4254701 or http://dx.doi.org/10.2139/ssrn.4254701

Benedikt Franke

University of Würzburg - Business Administration & Economics ( email )

Sanderring 2
Wuerzburg, D-97070
Germany

Allen H. Huang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong

HOME PAGE: http://www.AllenHuang.org

Reeyarn Zhiyang Li

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Hui Wang

Renmin University of China - School of Business ( email )

Beijing
China

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