Publication Type
Journal Article
Version
acceptedVersion
Publication Date
5-2020
Abstract
In this paper, we rely on an exogenous shock to examine the impact of litigation risk on real earnings management (REM). We conduct differences-in-differences tests centered on an unanticipated court ruling that reduced litigation risk for firms headquartered in the Ninth Circuit. REM increases significantly following the ruling for Ninth-Circuit firms relative to other firms, consistent with litigation risk deterring REM. Additional analyses reveal that REM rises more following the ruling when firms issue more optimistic disclosures. The evidence is consistent with litigation deterring REM by constraining managers' ability to issue optimistic and misleading disclosures that can conceal the myopic and opportunistic motives underlying REM. We further document that an increase in REM in response to a decline in litigation risk is more pronounced when managers have higher incentives to manipulate earnings and governance mechanisms are weaker.
Keywords
Real Earnings Management, Earnings Management, Deterrence, Litigation, Corporate Governance, Misleading Disclosure
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Reporting and Disclosure
Publication
Accounting Review
Volume
95
Issue
3
First Page
251
Last Page
278
ISSN
0001-4826
Identifier
10.2308/accr-52589
Publisher
American Accounting Association
Citation
HUANG, Sterling; ROYCHOWDHURY, Sugata; and SLETTEN, Ewa.
Does litigation deter or encourage real earnings management. (2020). Accounting Review. 95, (3), 251-278.
Available at: https://ink.library.smu.edu.sg/soa_research/1832
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/10.2308/accr-52589