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