Spillover Effects in Securities Litigation
44 Pages Posted: 22 Oct 2019 Last revised: 17 Jun 2020
Date Written: November 1, 2019
This study examines the spillover effect of securities litigation. Peers of the sued firm have negative three-day abnormal returns around case filings and continue underperforming over sixty trading days. Peers also improve financial reporting quality and change qualitative disclosure characteristics by providing more readable and positive annual reports while reducing the use of litigation-related terms. Finally, peers increase voluntary earnings guidance but reduce disclosure timeliness and precision. Results are primarily driven by meritorious cases (i.e., those that eventually settle), while nonmeritorious cases have little spillover. These peer changes appear largely successful as they have lower future litigation incidence.
Keywords: Securities Litigation; Financial Reporting; Disclosure; Peer Firm Spillover
JEL Classification: D82, G30, H26, K22, K41, M41
Suggested Citation: Suggested Citation