Does Conservative Reporting Deter Securities Class Action Lawsuits?

The number of accounting-related class action lawsuits has increased in recent decades, imposing billions of dollars of direct and indirect costs on public companies and, eventually, their shareholders each year. Although accounting theory says that litigation risk generates accounting conservatism as a pre-emptive defense, there is little empirical evidence on whether and how this defense works. In our paper, available here, we provide evidence that accounting conservatism helps companies avoid GAAP-related litigation and improve its outcome.

Accounting conservatism refers to the practice of requiring more verification to recognize good news as gains than to recognize bad news as losses.  … Read more

Managers’ Career Concerns and Asymmetric Disclosure of Bad versus Good News

Managers are concerned about how their current performance would influence their current employer’s and the labor market’s assessment of their ability. An unfavorable assessment of their ability can have significant adverse effects, including termination and poor job prospects thereafter. Thus, career concerns are likely to motivate managers to work hard and generate good performance. We further argue that career concerns may also motivate CEOs to withhold bad corporate news and gamble that subsequent corporate events will turn in their favor, enabling them to bury the bad news.  To test our prediction, we consider two situations when CEOs’ career concerns are … Read more