Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News

• In Event: Securities Litigation and Financial Reporting

Abstract

This study examines the legal consequences of disclosing adverse earnings news when broad market indices face a large decline. The probability of litigation rises to 0.26% (from 0.14%), and settlements increase 50% over the median (by $1.8 million) when disclosure occurs during a large market decline. Further, cases filed when the class period falls on a large market decline are more likely to be dismissed and lead to larger settlements- consistent with judges, but not potential jurors, discounting the effects of market returns. Finally, we find no evidence that managers delay disclosures to avoid days with large market declines. This result could be attributable to high costs of this strategy, or managers not recognizing the legal consequences to disclosing adverse news on a day where the market declines significantly.

Author

• Justin Joseph Hopkins, University of Virginia