Editor’s Note: The following post comes to us from Dain Donelson of the Department of Business, Government, and Society at the University of Texas at Austin, John McInnis of the Department of Accounting at the University of Texas at Austin, Richard Mergenthaler of the Department of Accounting at the University of Iowa, and Yong Yu of the Department of Accounting at the University of Texas at Austin.
In our paper, The Timeliness of Bad Earnings News and Litigation Risk, which was recently made publicly available on SSRN, we examine the relation between the timeliness of bad earnings news and the incidence of securities litigation. Skinner (1994) proposes that the earlier revelation of bad news reduces the expected costs of litigation because earlier revelation diminishes the perception that management “hid the truth” and reduces damages by shortening the class period. This litigation reduction hypothesis predicts that timelier revelation of bad earnings news should reduce the likelihood of being sued and/or the costs of resolving lawsuits that do occur.
