How Shareholder Litigation Affects Firm Disclosure

Litigation allows shareholders to seek remedies for fiduciary breaches by managers or directors, such as when there has been a misrepresentation of financial results or illegal insider trading. Twitter, for example, faces a derivative lawsuit alleging that executives provided misleading financial statements to hide poor performance while selling millions of dollars in personally held stock. [1] The threat of shareholder litigation can help constrain managerial opportunism and deter misconduct, thus serving as an important governance mechanism. Specifically, the threat of litigation can encourage managers to provide more detailed or transparent financial information to the market. In turn, enhanced information has … Read more