Learning While Working: How Do Early Litigation Experiences Affect Managers' Disclosure?

Abstract

We track the employment histories of over 3,000 chief executive officers (CEOs) and study how their past litigation experiences affect corporate disclosure decisions. We define litigation experience to be any securities class action experienced during a CEO’s early career in other firms and in non-CEO positions. We find that firms managed by these litigation-experienced CEOs provide guidance more frequently than firms not managed by such CEOs. Moreover, we find that they provide more timely earnings guidance, however, with wider range. We also find that market response to their disclosure is lower. Collectively, this evidence is consistent with the perspective that past litigation experience leads CEOs to increase the frequency with which they provide voluntary disclosure, but the surprise content (as measured by market reaction) of such disclosure falls. Such behavior is consistent with these managers seeking to avoid large price-change events, as such events are argued to attract litigation.