Does the Threat of Private Litigation Increase the Usefulness of Reported Earnings? International Evidence

Posted: 20 Sep 2006 Last revised: 16 Jun 2010

See all articles by Inder K. Khurana

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

K. K. Raman

The University of Texas at San Antonio

Dechun Wang

Texas A&M University

Date Written: June 16, 2010

Abstract

In this cross-border study, we document the usefulness of reported earnings as conditioned by varying levels of litigation risk. We focus on litigation risk, since Ball (2001) suggests that although litigation rights are seldom discussed in the context of international accounting, the threat of private litigation can motivate corporate insiders to increase transparency in financial reporting. We operationalize the quality of reported earnings based on their ability to predict the firm's future cash flows. The focus on future cash flows enables us to examine the usefulness of reported earnings without having to assume pricing similarities across stock markets. We examine the relation between litigation risk and earnings quality for firms in a sample of 34 countries. We find that the higher the litigation threat, the greater the predictive ability of reported earnings for future cash flows.

Keywords: Litigation risk, Earnings quality, Investor protection, Cross-border analysis

JEL Classification: K22, M41, M43, M47

Suggested Citation

Khurana, Inder and Raman, K. K. and Wang, Dechun, Does the Threat of Private Litigation Increase the Usefulness of Reported Earnings? International Evidence (June 16, 2010). Journal of International Accounting Research, Vol. 5, No. 2, pp. 21-40, Fall 2006. Available at SSRN: https://ssrn.com/abstract=931219

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

K. K. Raman (Contact Author)

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

Dechun Wang

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

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