ACCTG 502 | Session 6 | Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes 2019

Joel F. Houston, Chen Lin, Sibo Liu, Lai Wei

Introduction:

The study examines how changes in litigation risk affect firms' voluntary disclosure practices. Using three exogenous legal events in the U.S., the authors apply a matching-based fixed-effects difference-in-differences approach to identify causal effects. Results indicate that firms reduce management earnings forecasts when litigation risk decreases and increase them when litigation risk rises, with the effect mainly seen in disclosures of negative news. These findings are consistent across various specifications, samples, and disclosure measures.