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Corporate Non-Disclosure Disputes: Equilibrium Settlements with a Probabilistic Burden of Proof

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  • Miles B. Gietzmann
  • Adam J. Ostaszewski

Abstract

The literature of damages-assessment under the US disclosure 10b-5 rule proposes multiple formulations for a "proper measure" based on the legal "out-of-pocket" principle, i.e. the difference between original and an observed later price consequent on revealed information, with suspected prior disclosure omission. Key is the evolution of a putative "price-but for the omission". Proposed procedures include back-casting and forward-casting (between two dates, or via multiple intervening dates) -- Ferrell and Saha (2011). We derive, consistently with fair-pricing, a new model of induced litigation-behaviour referring to prices at and just before the revelation date. Parameters incentivise withholding of price-sensitive news under a `sparing' strategy.

Suggested Citation

  • Miles B. Gietzmann & Adam J. Ostaszewski, 2024. "Corporate Non-Disclosure Disputes: Equilibrium Settlements with a Probabilistic Burden of Proof," Papers 2410.13878, arXiv.org.
    • Handle: RePEc:arx:papers:2410.13878
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    References listed on IDEAS

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    1. Skinner, Dj, 1994. "Why Firms Voluntarily Disclose Bad-News," Journal of Accounting Research, Wiley Blackwell, vol. 32(1), pages 38-60.
    2. Francis, J & Philbrick, D & Schipper, K, 1994. "Shareholder Litigation And Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 137-164.
    3. Gietzmann, Miles & Ostaszewski, Adam, 2023. "The kind of silence: managing a reputation for voluntary disclosure in financial markets," LSE Research Online Documents on Economics 118554, London School of Economics and Political Science, LSE Library.
    4. Dybvig, Philip H. & Gong, Ning & Schwartz, Rachel, 2000. "Bias of Damage Awards and Free Options in Securities Litigation," Journal of Financial Intermediation, Elsevier, vol. 9(2), pages 149-168, April.
    5. Ronald A. Dye, 2017. "Optimal disclosure decisions when there are penalties for nondisclosure," RAND Journal of Economics, RAND Corporation, vol. 48(3), pages 704-732, August.
    6. Miles B. Gietzmann & Adam J. Ostaszewski, 2022. "The Kind of Silence: Managing a Reputation for Voluntary Disclosure in Financial Markets," Papers 2210.11315, arXiv.org, revised Mar 2023.
    7. Judson Caskey, 2014. "The Pricing Effects of Securities Class Action Lawsuits and Litigation Insurance," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(3), pages 493-532.
    8. Field, Laura & Lowry, Michelle & Shu, Susan, 2005. "Does disclosure deter or trigger litigation?," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 487-507, September.
    9. Iván Marinovic & Felipe Varas, 2016. "No news is good news: voluntary disclosure in the face of litigation," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 822-856, November.
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