The impact of shareholder litigation risk on income smoothing

Yiwei Li (), Wei Song (), Tingyu Sun () and Qingjing Zhang ()
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Yiwei Li: University of Essex
Wei Song: University of Nottingham
Tingyu Sun: University of Southampton
Qingjing Zhang: University of Southampton

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 4, No 7, 1379-1413

Abstract: Abstract This paper investigates whether and how shareholder litigation influences income smoothing. Using the ruling of the Ninth Circuit Court of Appeals in 1999 as an exogenous shock to the threat of litigation, we find that the increasing difficulty of class action lawsuits decreases income smoothing. This finding is robust to different model specifications. We also show that such an effect is stronger for firms that are more likely to face greater pressure from the threat of shareholder litigation risk. Overall, our findings extend the literature on investigating how class action lawsuits can affect the motivation of income smoothing.

Keywords: Shareholder litigation; Income smoothing; Earnings volatility; Class action lawsuits (search for similar items in EconPapers)
JEL-codes: K22 M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-023-01193-w

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