Accounting activities, security prices, and class action lawsuits

Abstract

Provisions in the securities acts provide incentives to purchasers of common stocks to initiate class action lawsuits when stock prices decline at and preceding announcements that directly reduce, or imply a reduction in, previously reported accounting book values. Reported common stock returns associated with alleged misrepresentations in financial statements are consistent with incentives provided by the law. Classification of misrepresentations based on hypothesized relations between announcements and security returns results in observed differences in the association between litigated accounting announcements and common stock returns.