AAA Spark Meeting of the Regions

Media Sentiment and Shareholder Litigation

• In Event: Corporate Governance and Media

Abstract

We investigate whether media sentiment influences the likelihood of securities litigation following negative corporate events. We find that negative media sentiment around firms’ accounting restatement announcements increases the likelihood of a subsequent shareholder lawsuit. We document this relation develops along two distinct paths. Consistent with prior research that suggests media sentiment can influence stock prices around corporate news events, we find negative media sentiment heightens litigation risk by exacerbating the stock market response to restatement announcements (the Market Response Path). However, we also find negative media sentiment predicts shareholder litigation after controlling for the market response and other economic characteristics of the restatement announcement (the Narrative Setting Path). This latter effect is consistent with the view that media sentiment creates narratives that influence investors’ assessments of the likelihood of prevailing in a lawsuit. Overall, our results suggest the influence of media sentiment in shaping real economic outcomes in financial markets extends beyond pricing effects.

Authors

• Richard Arnold Cazier, University of North Texas

• Jianning Huang, University of Manitoba

• Jeff McMullin, Indiana University

• Fuzhao Zhou, Bowling Green State University