Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News

• 成果类型: Article
• 署名作者: Donelson, Dain C.; Hopkins, Justin J.
• 署名单位: University of Texas System; University of Texas Austin; University of Virginia
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2015.2306
• 发表日期: 2016
• 页码: 3183-3198
• 关键词: accounting; disclosure; Securities litigation; judicial-legal

摘要

This study finds that large marketwide declines in stock prices are associated with higher litigation incidence and settlements even though marketwide events are legally irrelevant. The probability of litigation nearly doubles (from 0.29% to 0.55%) and the amount of settlements also doubles (from $5.0 million to $10.1 million) when earnings disclosures occur during a large market decline, even after controlling for the firm's market-adjusted return. Furthermore, judges with (without) specialized experience in securities litigation are more (less) likely to dismiss cases triggered by disclosures during large market declines. This pattern is consistent with experienced judges recognizing and dismissing weaker cases. Finally, managers are less likely to disclose adverse news at the end of trading days with large market declines. Although we cannot definitively identify the motive behind this pattern, it is consistent with managers recognizing increased litigation risk during large market declines.