Litigation Risk and Corporate Voluntary Disclosure: Evidence from Two Quasi-Natural Experiments

Hui Dong and Huai Zhang

European Accounting Review, 2019, vol. 28, issue 5, 873-900

Abstract: We examine the effect of litigation risk on corporate voluntary disclosure using two quasi-natural experiments, which have substantial and opposing impacts on the litigation risk of firms headquartered in the Ninth Circuit. We find that firms in the Ninth Circuit decrease (increase) the quantity and quality of their voluntary disclosure, relative to control firms, when their litigation risk is lowered (elevated). The pre-treatment test shows an indistinguishable trend between treatment and control firms. A battery of robustness checks indicates that our results are not driven by alternative explanations. We hypothesize and find that the impact of litigation risk is more pronounced when firms have bad news and that firms are more likely to preempt bad news through voluntary disclosures when litigation risk is elevated. Overall, results from both experiments suggest that litigation risk causally increases corporate voluntary disclosure.

Date: 2019
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DOI: 10.1080/09638180.2018.1559071

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