Disclosure Strategies and Shareholder Litigation Risk: Evidence from Earnings Restatements
Abstract: Using a comprehensive data set of restatement announcements and regulatory filings by more than 1600 U.S.-listed firms between 2003 and 2009, we find evidence that some managers strategically time disclosures of negative information to minimize litigation risk by bundling negative information, such as earnings restatements, with other public announcements. The findings also suggest that some managers use bundling strategies to adapt to the litigation environment, particularly to a major 2005 Supreme Court decision requiring that plaintiffs show a causal relationship between a firm's revelation of negative information and a statistically significant decline in the firm's stock price. Our empirical results indicate that news bundling can discourage shareholder litigation by protecting the stock price and by obfuscating the negative effect of a restatement. Our study provides evidence that firms react to case law in choosing their disclosure strategies, and that some choose strategies to game the pleading standards established by the courts.
