Disclosure of Pending Lawsuits and Bond Terms

50 Pages Posted: 23 Jul 2013 Last revised: 22 May 2018

See all articles by Yun Lou

Yun Lou

Singapore Management University - School of Accountancy

Date Written: December 18, 2017

Abstract

I examine the effect of the disclosure of pending lawsuits in 10-K/Q filings on the contractual terms of newly issued bonds. I find that firms’ decision to disclose pending lawsuits and the amount of disclosed information (i.e., the level of disclosure) have opposite effects. Specifically, firms that disclose a higher proportion of their pending lawsuits face higher yields and are more likely to include default clauses pertaining to court judgments in the bond prospectuses. However, within the subsample of firms that disclose their lawsuits, I find that firms with a higher level of disclosure regarding their pending lawsuits are rewarded with lower yields. This evidence suggests that bond investors interpret the decision to disclose pending lawsuits as a sign that the potential losses due to these lawsuits are material and reasonably possible and thus demand more stringent bond terms. However, bond investors associate a higher level of disclosure with a lower likelihood of withholding bad news and thus accept lower yields.

Keywords: Disclosure of Pending Lawsuits, Bond Terms, Default Clauses

JEL Classification: G32, M40

Suggested Citation

Lou, Yun, Disclosure of Pending Lawsuits and Bond Terms (December 18, 2017). Management Science Forthcoming, Singapore Management University School of Accountancy Research Paper No. 2018-77, Available at SSRN: https://ssrn.com/abstract=2296848 or http://dx.doi.org/10.2139/ssrn.2296848

Yun Lou (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
818
rank
410,747
PlumX Metrics