Publication Type
Journal Article
Version
submittedVersion
Publication Date
4-2019
Abstract
I examine the effect of the disclosure of pendinglawsuits in 10-K/Q filings on the contractual terms of newly issued bonds. Ifind that firms’ decision to disclose pending lawsuits and the amount ofdisclosed information (i.e., the level of disclosure) have opposite effects.Specifically, firms that disclose a higher proportion of their pending lawsuitsface higher yields and are more likely to include default clauses pertaining tocourt judgments in the bond prospectuses. However, within the subsample offirms that disclose their lawsuits, I find that firms with a higher level of disclosureregarding their pending lawsuits are rewarded with lower yields. This evidencesuggests that bond investors interpret the decision to disclose pendinglawsuits as a sign that the potential losses due to these lawsuits are materialand reasonably possible and thus demand more stringent bond terms. However, bondinvestors associate a higher level of disclosure with a lower likelihood ofwithholding bad news and thus accept lower yields.
Keywords
Pending Lawsuits, Bond Terms, Default Clauses
Discipline
Accounting | Corporate Finance | Portfolio and Security Analysis
Research Areas
Corporate Reporting and Disclosure
Publication
Management Science
Volume
65
Issue
4
First Page
1455
Last Page
1947
ISSN
0025-1909
Identifier
10.1287/mnsc.2017.3021
Publisher
INFORMS (Institute for Operations Research and Management Sciences)
Citation
LOU, Yun.
Disclosure of pending lawsuits and bond terms. (2019). Management Science. 65, (4), 1455-1947.
Available at: https://ink.library.smu.edu.sg/soa_research/1731
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1287/mnsc.2017.3021