The Effect of Securities Litigation Risk on Firm Value and Disclosure

51 Pages Posted: 29 Mar 2024 Last revised: 9 May 2024

See all articles by Dain C. Donelson

Dain C. Donelson

University of Wisconsin - Madison - Department of Accounting and Information Systems

Christian M. Hutzler

University of Iowa

Brian Monsen

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Christopher G. Yust

Texas A&M University

Date Written: October 5, 2022

Abstract

Critics assert that securities class actions are economically burdensome and yield minimal recoveries, whereas proponents claim they deter wrongdoing. We examine key events in the recent Goldman Sachs Supreme Court case to test the net effect of securities litigation risk on shareholder value. We find that investors view securities class actions as value-increasing. However, the strength of this effect varies based on external monitoring. Investors view securities class actions as more value-enhancing when institutional ownership is low. We also use this setting to examine the effect of securities litigation risk on mandatory disclosure because the Goldman Sachs case focuses on mandatory disclosure properties. Using a difference-in-differences design, we find firm risk factor disclosures become shorter and less similar to industry peers, and they contain more uncertain and weak terms. Overall, our results show nuanced effects of securities litigation risk on shareholder value and firm disclosure.

Keywords: Securities Litigation Risk, Shareholder Value, Governance, Class Certification, Disclosure

JEL Classification: G14, G23, G30, G32, G34, G38, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Hutzler, Christian M. and Monsen, Brian and Yust, Christopher, The Effect of Securities Litigation Risk on Firm Value and Disclosure (October 5, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4748971 or http://dx.doi.org/10.2139/ssrn.4748971

Dain C. Donelson

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Christian M. Hutzler

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

Brian Monsen

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Christopher Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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