Disclosure Strategies and Shareholder Litigation Risk

Abstract

Using a large set of restatement announcements and regulatory filings by U.S.-listed firms between 2003 and 2009, we find evidence that managers aim to reduce litigation risk by (1) bundling negative information, such as earnings restatements, with other public announcements, and (2) leaking negative information prior to announcements. We use a major 2005 Supreme Court decision requiring that plaintiffs link the revelation of negative information to a statistically significant stock price decline as a natural experiment: after the decision, managers increasingly act opportunistically to obfuscate the negative effects of a restatement by increasing how much they bundle and leak information.