Securities class actions and conditional conservatism: Evidence from two legal events

Chen, X; Lu, M; Shan, Y; Zhang, Y

Securities class actions and conditional conservatism: Evidence from two legal events

Chen, X Lu, M Shan, Y

Zhang, Y

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Publisher:: WILEY
Publication Type:: Journal Article
Citation:: Accounting and Finance, 2022
Issue Date:: 2022-01-01

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Field	Value	Language
dc.contributor.author	Chen, X
dc.contributor.author	Lu, M
dc.contributor.author	Shan, Y https://orcid.org/0000-0003-2156-8722
dc.contributor.author	Zhang, Y
dc.date.accessioned	2022-09-29T19:59:54Z
dc.date.available	2022-09-29T19:59:54Z
dc.date.issued	2022-01-01
dc.identifier.citation	Accounting and Finance, 2022
dc.identifier.issn	0810-5391
dc.identifier.issn	1467-629X
dc.identifier.uri	http://hdl.handle.net/10453/162184
dc.description.abstract	We use two US court rulings as exogenous shocks to firms' litigation environment and examine the changes in conservative financial reporting following these court decisions. The Silicon Graphics ruling in 1999 imposed a heightened pleading standard and discouraged the filing of shareholder lawsuits against firms with headquarters in the Ninth Circuit. The Tellabs ruling in 2007, however, effectively reversed the Silicon Graphics ruling and made it easier to file securities litigation against Ninth Circuit firms. We predict and find that the reduced litigation risk following the Silicon Graphics ruling discourages conservative reporting for Ninth Circuit firms. By contrast, the elevated threat of shareholder lawsuits following the Tellabs ruling encourages conservative reporting for Ninth Circuit firms relative to non-Ninth Circuit firms. The disciplining effect of the threat of shareholder lawsuits on conservatism is stronger for firms facing higher ex ante litigation risk. The litigation-risk-induced increase (decrease) in reporting conservatism leads to higher (lower) firm valuations.
dc.language	English
dc.publisher	WILEY
dc.relation	http://purl.org/au-research/grants/arc/DP210101004
dc.relation	http://purl.org/au-research/grants/arc/DP210101354
dc.relation.ispartof	Accounting and Finance
dc.relation.isbasedon	10.1111/acfi.12979
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	1402 Applied Economics, 1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment
dc.subject.classification	Accounting
dc.title	Securities class actions and conditional conservatism: Evidence from two legal events
dc.type	Journal Article
utslib.for	1402 Applied Economics
utslib.for	1501 Accounting, Auditing and Accountability
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Accounting Discipline
utslib.copyright.status	open_access	*
dc.date.updated	2022-09-29T19:59:51Z
pubs.publication-status	Published

Abstract:

We use two US court rulings as exogenous shocks to firms' litigation environment and examine the changes in conservative financial reporting following these court decisions. The Silicon Graphics ruling in 1999 imposed a heightened pleading standard and discouraged the filing of shareholder lawsuits against firms with headquarters in the Ninth Circuit. The Tellabs ruling in 2007, however, effectively reversed the Silicon Graphics ruling and made it easier to file securities litigation against Ninth Circuit firms. We predict and find that the reduced litigation risk following the Silicon Graphics ruling discourages conservative reporting for Ninth Circuit firms. By contrast, the elevated threat of shareholder lawsuits following the Tellabs ruling encourages conservative reporting for Ninth Circuit firms relative to non-Ninth Circuit firms. The disciplining effect of the threat of shareholder lawsuits on conservatism is stronger for firms facing higher ex ante litigation risk. The litigation-risk-induced increase (decrease) in reporting conservatism leads to higher (lower) firm valuations.

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http://hdl.handle.net/10453/162184