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Do Securities Class Actions Deter Misreporting?

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  • Justin Hopkins

Abstract

This paper investigates whether a U.S. circuit court ruling that made it easier for public corporations to defend against security class actions led to more misreporting. In a difference‐in‐differences framework, I find an increase in restatements for firms affected by the ruling relative to unaffected firms. Furthermore, within affected firms, these results are concentrated among those that experienced the lowest abnormal returns in response to the ruling, the firms most likely to face meritorious litigation, and among those firms that saw decreases (increases) in dedicated (transient) institutional ownership after the ruling. Inferences are similar examining cross‐sectional tests in a levels framework. These results suggest that the threat of shareholder litigation can discipline managerial reporting practices and deter misreporting. As such, this evidence informs the debate about the role of securities class actions in regulating securities markets. Les recours collectifs en valeurs mobilières font‐ils obstacle à la publication d'information inexacte ? L'auteur se demande si la décision rendue par un tribunal des États‐Unis aux termes de laquelle il devenait plus facile pour les sociétés ouvertes de contester les recours collectifs en valeurs mobilières a entraîné la multiplication des cas de publication d'information inexacte. En procédant à des analyses d'écart dans les différences, il note une hausse du nombre de retraitements chez les sociétés touchées par cette décision, comparativement à celles qui ne le sont pas. Il constate en outre que ces résultats, parmi les sociétés touchées, sont concentrés chez celles qui ont connu les rendements anormaux les plus faibles par suite de cette décision, celles qui sont le plus susceptibles de faire l'objet de poursuites dont l'issue sera favorable au demandeur, et chez les sociétés qui ont observé des diminutions (augmentations) du nombre de leurs actionnaires institutionnels fidèles (passagers) après la décision. L'auteur tire des conclusions semblables d'analyses transversales relatives aux niveaux d'actionnariat. Ces résultats permettent de croire que la menace de poursuites de la part des actionnaires contribue à encadrer les pratiques des dirigeants en matière d'information et à les dissuader de produire de l'information inexacte. De telles constatations éclairent le débat au sujet du rôle des recours collectifs en valeurs mobilières dans la réglementation des marchés de valeurs.

Suggested Citation

  • Justin Hopkins, 2018. "Do Securities Class Actions Deter Misreporting?," Contemporary Accounting Research, John Wiley & Sons, vol. 35(4), pages 2030-2057, December.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:4:p:2030-2057
    DOI: 10.1111/1911-3846.12367
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    Cited by:

    1. Xiaomeng Chen & Meiting Lu & Yaowen Shan & Yizhou Zhang, 2023. "Securities class actions and conditional conservatism: Evidence from two legal events," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2441-2471, June.
    2. Hassan, M. Kabir & Houston, Reza & Karim, M. Sydul, 2021. "Courting innovation: The effects of litigation risk on corporate innovation," Journal of Corporate Finance, Elsevier, vol. 71(C).
    3. Patrick Velte, 2023. "The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research," Management Review Quarterly, Springer, vol. 73(1), pages 353-411, February.
    4. Elmawazini, Khaled & Galariotis, Emilios & Hossain, Ashrafee T. & Rjiba, Hatem, 2024. "Federal judge ideology and real earnings management," International Review of Financial Analysis, Elsevier, vol. 92(C).
    5. Islam, Emdad & Rahman, Lubna, 2023. "Shades of grey: Risk-related agency conflicts and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 83(C).
    6. Huilin Zhang & Xiaoran Ni & Qi Jin, 2023. "Litigating crashes? Insights from security class actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2935-2963, September.
    7. 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.
    8. Fang Fang & Wang Tian & Zhang Yanfei, 2023. "Test on the law protection of minority investors in China: Perspective of misrepresentation in securities market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1642-1655, April.
    9. Le, Nhan & Nguyen, Duc Duy & Sila, Vathunyoo, 2021. "Does shareholder litigation affect the corporate information environment?," Journal of Financial Markets, Elsevier, vol. 56(C).
    10. Chung, Chune Young & Kim, Incheol & Rabarison, Monika K. & To, Thomas Y. & Wu, Eliza, 2020. "Shareholder litigation rights and corporate acquisitions," Journal of Corporate Finance, Elsevier, vol. 62(C).
    11. Hutton, Amy & Shu, Susan & Zheng, Xin, 2022. "Regulatory transparency and the alignment of private and public enforcement: Evidence from the public disclosure of SEC comment letters," Journal of Financial Economics, Elsevier, vol. 145(1), pages 297-321.
    12. Ahsan Habib & Dinithi Ranasinghe & Julia Yonghua Wu & Pallab Kumar Biswas & Fawad Ahmad, 2022. "Real earnings management: A review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4279-4344, December.
    13. Al-Hadi, Ahmed & Taylor, Grantley & Monzur Hasan, Mostafa & Eulaiwi, Baban, 2023. "Third-party auditor liability and financial restatements," The British Accounting Review, Elsevier, vol. 55(2).
    14. Donelson, Dain C. & Kettell, Laura & McInnis, John & Toynbee, Sara, 2022. "The need to validate exogenous shocks: Shareholder derivative litigation, universal demand laws and firm behavior," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    15. Al-Hadi, Ahmed & Habib, Ahsan, 2023. "Consequences of state-level regulations in accounting, finance, and corporate governance: A review," Advances in accounting, Elsevier, vol. 60(C).
    16. Yiwei Li & Wei Song & Tingyu Sun & Qingjing Zhang, 2023. "The impact of shareholder litigation risk on income smoothing," Review of Quantitative Finance and Accounting, Springer, vol. 61(4), pages 1379-1413, November.

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