Management Forecasts and Litigation Risk

Management Forecasts and Litigation Risk
Author(s): Brown, Stephen and Hillegeist, Stephen A. and Lo, Kin
Year: 2005
Paper Number: GBS-ACC-2005-002
Goizueta Department: Accounting

Abstract

We examine the influence of the ex ante risk of class action securities litigation on firms' decisions to issue management earnings forecasts as well as the characteristics of those forecasts. We find that litigation risk is positively associated with the likelihood of issuing a forecast for both good- and bad-news firms. While the association is marginally stronger for firms with bad earnings news, our results suggest that litigation risk is unlikely to explain the observed preponderance of bad-news forecasts. We examine the effect of litigation risk on the amount of the total earnings news released in the forecast, on forecast horizon, and on forecast precision. These results indicate that higher litigation risk is associated with a higher proportion of news being released when firms have bad news. Finally, higher litigation risk is associated with forecasts being released earlier and being more precise.