Abstract
I used a performance-matched sample to test the change in the degree of conservatism for the lawsuit firms after litigation from 1996 to 2006. Using Basu’s measure and accruals measure as proxy for conservatism, I find that lawsuit firms are less conservative than the matched firms before litigation. In the post-litigation period, result from Basu’s measure suggests that the sued firms are still less conservative than the matched firms in terms of the timeliness in recognizing losses as compared to recognizing gains. Result from the accruals measure suggests that there is no significant difference in total accruals between the lawsuit firms and the matched firms in the post-litigation period. The tests of the change of degree of conservatism for the pre- and post-litigation period provide mixed results. Basu’s measure of conservatism suggests that lawsuit firms recognize losses in a significantly timelier manner after litigation. The test using the accruals measure fails to find a significant difference in the degree of conservatism in the pre- and post-litigation period for the lawsuit firms.
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