Disclosure Strategies and Shareholder Litigation Risk

We use the staggered adoption of the Universal Demand Laws (UD Laws) to examine the effect of an exogenous reduction in shareholders' ability to litigate on the extent of accounting conservatism. On average, we find an increase in reporting conservatism post UD. The increased conservatism is concentrated in firms contemplating equity issuance, with high proportion of monitoring investors, and high corporate governance quality. In contrast, firms with specific short-term incentives for aggressive accounting, such as those narrowly beating benchmarks, those with abnormal insider trading and those likely to violate debt covenants, weakly governed firms, and firms with high ex ante litigation risk decrease reporting conservatism after UD. Our results suggest that the relation between the litigation environment and reporting conservatism is complex and dependent on specific characteristics and unique circumstances of the firms.

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The Spillover of Shareholder Litigation Risk and Corporate Voluntary Disclosure

SSRN Electronic Journal ◽

10.2139/ssrn.3745937 ◽

2020 ◽

Author(s):

Mengchao Ai ◽

John (Jianqiu) Bai ◽

Ting Chen ◽

Amy X. Sun ◽

Chi Wan

Keyword(s):

Voluntary Disclosure ◽

Litigation Risk ◽

Shareholder Litigation

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Disclosure Tone and Shareholder Litigation

The Accounting Review ◽

10.2308/accr-10137 ◽

2011 ◽

Vol 86 (6) ◽

pp. 2155-2183 ◽

Cited By ~ 221

Author(s):

Jonathan L. Rogers ◽

Andrew Van Buskirk ◽

Sarah L. C. Zechman

Keyword(s):

Earnings Announcements ◽

General Purpose ◽

Data Availability ◽

Litigation Risk ◽

Shareholder Litigation ◽

Disclosure Tone ◽

Context Specific ◽

Jel Classifications

ABSTRACT We examine the relation between disclosure tone and shareholder litigation to determine whether managers' use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms' earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimistic language increasing litigation risk. In addition, we find incrementally greater litigation risk when managers are both unusually optimistic and engage in abnormal selling. This finding suggests that firms can mitigate litigation risk by ensuring that optimistic statements are not contradicted by insider selling. Finally, we find that insider selling is associated with litigation risk only when contemporaneous disclosures are unusually optimistic. JEL Classifications: G38; K22; M41; M48. Data Availability: Data are available from sources indicated in the text.

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On the role of the chief risk officer and the risk committee in insuring financial institutions against litigation

Managerial Finance ◽

10.1108/mf-05-2016-0127 ◽

2017 ◽

Vol 43 (1) ◽

pp. 19-43 ◽

Cited By ~ 2

Author(s):

Arash Amoozegar ◽

Kuntara Pukthuanthong ◽

Thomas J. Walker

Keyword(s):

Financial Institutions ◽

Abnormal Returns ◽

Class Action ◽

Influential Factor ◽

Risk Governance ◽

Bank Performance ◽

Litigation Risk ◽

Single Measure ◽

Content Type ◽

Shareholder Litigation

Purpose In most financial institutions, chief risk officers (CROs) and their risk management (RM) staff fulfill a role in managing risk exposures, yet their lack of involvement in the governance has been cited as an influential factor that contributed to the financial crisis of 2007-2008. Various legislative and regulatory bodies have pressured financial firms to improve their risk governance structures to better weather potential future crises. Assuming that CROs and risk committees are given sufficient power to influence the corporate governance of financial institutions, can CROs and risk committees protect financial institutions from violating litigable securities law? Can they improve bank performance? The paper aims to discuss these issues. Design/methodology/approach The authors employ a principal component analysis to construct a single measure that captures various aspects of RM in a firm. The authors compare the risk governance characteristics of sued firms with their non-sued peers and consider one of the final outcomes of risky behavior: shareholder litigation. The authors compute ROA and buy-and-hold abnormal returns to capture operating and stock performance and examine whether risk governance improves bank performance by reducing litigation risk. Findings Proper risk governance reduces a firm’s litigation probability. The addition of the RM factor to models that have been previously proposed in the literature improves the accuracy of those models in identifying companies that are most susceptible to class action lawsuits. Better RM improves the financial and stock price performance of financial institutions. Research limitations/implications The data collection is laborious as the information about CRO governance has to be hand-collected from the 10-K report. A broader sample employing, e.g., non-US banks may provide additional insights into the relationship between RM practices, shareholder litigation, and bank performance. Practical implications The study shows that a bank’s RM functions play a critical role in improving bank and operating performance and in reducing shareholder litigation. Banks should emphasize the RM function. Originality/value This is the first study to examine the mechanism behind the positive association between RM and bank performance. The study shows that better RM improves overall bank performance by decreasing litigation risk.

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The Sound of Silence: What Do We Know When Insiders Do Not Trade?

Management Science ◽

10.1287/mnsc.2021.4113 ◽

2021 ◽

Author(s):

George P. Gao ◽

Qingzhong Ma ◽

David T. Ng ◽

Ying Wu

Keyword(s):

Stock Returns ◽

Information Content ◽

Insider Trading ◽

Bad News ◽

Litigation Risk ◽

Shareholder Litigation

This paper examines the information content of insider silence, periods of no insider trading. We hypothesize that, to avoid litigation risk, rational insiders do not sell own-company shares when they anticipate bad news; neither would they buy, given unfavorable prospects. Thus, they keep silent. By contrast, insiders sell shares when they do not anticipate significant bad news. Future stock returns are significantly lower following insider silence than following insider net selling, especially among firms with higher litigation risk. We examine two quasinatural experiments where new laws result in changes in shareholder litigation risks for insiders. In both cases, with higher shareholder litigation risks, stocks where insiders stay silent earn significantly lower returns than other stocks. This paper was accepted by Karl Diether, finance.

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