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The Effect of CFO Personal Litigation Risk on Firms’ Disclosure and Accounting Choices

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  • Hagit Levy
  • Ron Shalev
  • Emanuel Zur

Abstract

In Gantler v. Stephens (2009), the Delaware Supreme Court makes explicit that corporate officers owe the same fiduciary duty to the firm and shareholders as do board members. The decision increased the risk of non‐board‐serving officers being added as named defendants to investor litigation but did not change the risk of corporate litigation. Analyzing the effect of the Gantler ruling on non‐board‐serving CFOs, we find a significant change in their behavior as well as in their firms’ disclosure and accounting choices. Specifically, speech tone during earnings calls of non‐board‐serving CFOs becomes more negative when compared to board‐serving CFOs and the firm's CEO, and non‐board‐serving CFO firms disclose bad news earlier and report more conservatively. Results are stronger for firms incorporated in Delaware. Our findings suggest that CFOs respond to personal litigation risk over and above corporate litigation risk. Dans le jugement Gantler v. Stephens (2009), la Cour suprême du Delaware a explicitement indiqué que les dirigeants d'entreprise avaient à l’égard d'une société et de ses actionnaires les mêmes obligations fiduciaires que les membres du conseil d'administration (CA). Cette décision a accru le risque que des dirigeants ne siégeant pas au conseil d'administration figurent au nombre des défendeurs désignés dans les poursuites des investisseurs, mais elle n'a rien changé au risque de poursuites judiciaires auquel est exposée l'entreprise. Les auteurs, qui analysent l'incidence du jugement Gantler sur les directeurs financiers ne siégeant pas au CA, observent un changement marqué dans leur comportement ainsi que dans les décisions des sociétés quant à la publication d'information et aux choix comptables. Ils constatent plus précisément qu'en période de communication des résultats, le ton du discours des directeurs financiers ne siégeant pas au CA devient plus négatif, comparativement à celui des directeurs financiers siégeant au CA et des chefs de la direction, et que les sociétés dont le directeur financier ne siège pas au CA communiquent les mauvaises nouvelles plus tôt et font preuve de plus de prudence dans l'information publiée. Les résultats de l’étude sont plus marqués pour les sociétés constituées au Delaware. Les constatations des auteurs permettent de croire que les directeurs financiers réagissent au risque de poursuites judiciaires auquel ils sont personnellement exposés, au‐delà du risque de poursuites judiciaires que court l'entreprise.

Suggested Citation

  • Hagit Levy & Ron Shalev & Emanuel Zur, 2018. "The Effect of CFO Personal Litigation Risk on Firms’ Disclosure and Accounting Choices," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 434-463, March.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:1:p:434-463
    DOI: 10.1111/1911-3846.12378
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    Cited by:

    1. Sudipta Basu & Yi Liang, 2019. "Director–Liability–Reduction Laws and Conditional Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 57(4), pages 889-917, September.
    2. Kerstin Lopatta & Thomas Kaspereit & Sebastian A. Tideman & Anna R. Rudolf, 2022. "The moderating role of CEO sustainability reporting style in the relationship between sustainability performance, sustainability reporting, and cost of equity," Journal of Business Economics, Springer, vol. 92(3), pages 429-465, April.
    3. Devrimi Kaya & Christian Maier & Tobias Böhmer, 2020. "Empirische Kapitalmarktforschung zu Conference Calls: Eine Literaturanalyse [Empirical Capital Market Research on Conference Calls: A Literature Review]," Schmalenbach Journal of Business Research, Springer, vol. 72(2), pages 183-212, June.
    4. Qu, Shawn, 2024. "Costs may be a blessing in disguise: Litigation risk and greenwashing," Finance Research Letters, Elsevier, vol. 62(PA).
    5. Pamela R. Murphy & Michael Wynes & Till‐Arne Hahn & Patricia G. Devine, 2020. "Why Are People Honest? Internal and External Motivations to Report Honestly†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 945-981, June.
    6. Hui Deng & Lingyun Xiong & Lijuan Xiao, 2024. "Does patent infringement litigation affect stock price crash risk? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 3-39, March.
    7. De Franco, Gus & Shohfi, Thomas & Xu, Da & Zhu, Zhiwei (Vivi), 2023. "Fixed income conference calls," Journal of Accounting and Economics, Elsevier, vol. 75(1).

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