The Information Content of Corporate Litigation Disclosure of Shareholder Class Action Lawsuits.

• In Event: Financial Statement Disclosure

Abstract

In this study we investigate the content of voluntary litigation disclosure in corporate filings. Prior studies report that companies are not very forthcoming with quantitative estimates of potential legal liabilities. We analyze the tone and quantity of qualitative litigation disclosure for nearly 300 shareholder class action lawsuits settled in the period of 2006-2014. Our findings indicate that majority of the qualitative statements (“soft” disclosure) are not associated with short-term market reaction to settlement announcements. However, accrual of legal liabilities prior to settlement is more informative to investors, as it mitigates the surprise reaction around settlements. We conclude that pre-agreement accrual of contingent liabilities seems to be a more credible signal to investors. We also find some evidence that inconsistent qualitative disclosure gets penalized by the market. Our results suggest that investors have some knowledge of the future lawsuit outcome and are not fooled by misleading disclosure.

Authors

• Zhanel DeVides, Rutgers University - Camden

• Hyoseok Hwang, Rutgers University - Camden