Do the Merits Matter More after Securities Litigation Reform? Evidence from Restatements, Earnings Forecasts, and Insider Trading

38 Pages Posted: 10 Sep 2004

See all articles by Marilyn F. Johnson

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems

Karen K. Nelson

Texas Christian University - Department of Accounting

Adam C. Pritchard

University of Michigan Law School

Date Written: July 2004

Abstract

This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with expectations, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and insider selling after the PSLRA. There is no evidence, however, of an association between litigation and abnormal insider selling either before or after the PSLRA, even though this measure conforms more closely with legal standards for assessing fraudulent intent. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements and abnormal insider selling. Thus, unlike lawsuit filings, the outcome of litigation does conform with judicial doctrine regarding insider trading. Consistent with Skinner (1997), there is no association between the likelihood of settlement and firms' forward-looking earnings disclosures.

Keywords: stockholder litigation, restatements, earnings forecasts, insider trading

JEL Classification: M41, K22

Suggested Citation

Johnson, Marilyn F. and Nelson, Karen K. and Pritchard, Adam C., Do the Merits Matter More after Securities Litigation Reform? Evidence from Restatements, Earnings Forecasts, and Insider Trading (July 2004). Available at SSRN: https://ssrn.com/abstract=589221 or http://dx.doi.org/10.2139/ssrn.589221

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-0152 (Phone)
517-432-1101 (Fax)

Karen K. Nelson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Adam C. Pritchard

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
179
Abstract Views
2,211
rank
187,355
PlumX Metrics