The timeliness of bad earnings news and litigation risk

Dain C. Donelson, John M. McInnis, Richard D. Mergenthaler, Yong Yu

Research output: Contribution to journalArticlepeer-review

77 Scopus citations

Abstract

This study investigates whether the timely revelation of bad earnings news is associated with a lower incidence of litigation. The timeliness of earnings news is captured by a new measure based on the evolution of the consensus analyst earnings forecast. Holding total bad earnings news and other determinants of litigation constant, we find that earlier revelation of bad earnings news lowers the likelihood of litigation. This result holds for both settled and dismissed lawsuits. Further, we reconcile our findings with prior work that measures timeliness using managerial warnings via press releases. These tests suggest our findings are attributable to the ability of our timeliness measure to capture bad earning news revealed through disclosure channels beyond press releases.

Original languageEnglish (US)
Pages (from-to)1967-1991
Number of pages25
JournalAccounting Review
Volume87
Issue number6
DOIs
StatePublished - Nov 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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