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Securities law precedents, legal liability, and financial reporting quality

Author

Listed:
  • Benedikt Franke
  • Allen H Huang
  • Reeyarn Z Li
  • Hui Wang

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.

Suggested Citation

  • Benedikt Franke & Allen H Huang & Reeyarn Z Li & Hui Wang, 2024. "Securities law precedents, legal liability, and financial reporting quality," Review of Finance, European Finance Association, vol. 28(2), pages 413-445.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:2:p:413-445.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad032
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    More about this item

    Keywords

    securities litigation; case law; precedents; legal liability; financial reporting quality;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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