ACCTG 502 | Session 9 | The Timeliness of Bad Earnings News and Litigation Risk

ACCTG 502 | Session 9 | The Timeliness of Bad Earnings News and Litigation Risk - 2012 Dain C. Donelson, John M. Mclnnis, Richard D. Mergenthaler, Yong Yu Introduction: This study examines whether the prompt disclosure of bad earnings news is linked to a lower rate of litigation. The promptness of earnings news is measured by a new metric based on the progression of the consensus analyst earnings forecast. After controlling for total bad earnings news and other factors influencing litigation, we find that earlier disclosure of bad earnings news decreases the likelihood of litigation. This finding applies to both settled and dismissed lawsuits. Additionally, we compare our results with previous research that measures timeliness through managerial warnings issued via press releases. These tests indicate that our findings are due to the ability of our timeliness measure to detect bad earnings news disclosed through channels other than press releases.