Securities law precedents, legal liability, and financial reporting quality

Benedikt Franke, Allen H Huang, Reeyarn Z Li and Hui Wang

Review of Finance, 2024, vol. 28, issue 2, 413-445

Abstract: In common-law systems, firms’ litigation risk depends both on written laws and how courts interpret these laws. Using 321 US circuit court rulings, we introduce a novel measure capturing courts’ attitudes toward defendants in securities lawsuits. Our results confirm that financial misreporting firms in more defendant-friendly circuits face fewer lawsuits. Consistent with lower expected litigation costs, firms in these circuits face less negative market reactions when misreporting is revealed, invest less in preventing misreporting, and are more likely to engage in aggressive misreporting. We conclude that defendant-friendly precedents reduce firms’ legal liability and worsen their financial reporting quality.

Keywords: securities litigation; case law; precedents; legal liability; financial reporting quality (search for similar items in EconPapers)
JEL-codes: G14 K22 K40 M41 (search for similar items in EconPapers)
Date: 2024
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