Publication Type
Journal Article
Version
acceptedVersion
Publication Date
1-2025
Abstract
Securities litigation risk is a well-recognized yet underexplored source of financial reporting complexity or unreadability. This study examines the effect of litigation risk on the readability of corporate financial reports. The 1999 Silicon Graphics Inc. (SGI) court ruling unexpectedly reduced litigation risk for firms within the Ninth Circuit Court's jurisdiction. Using a difference-in-differences design centered on the SGI court ruling, we find that, while the readability of financial reports generally declines over the sample period, treated firms in the Ninth Circuit experience a comparatively smaller decline in readability than control firms in other states after the ruling. Put differently, treated firms experience a relative improvement in reporting readability following the ruling. This effect is concentrated among firms prone to securities litigation and those with greater external financing needs, but it is muted for firms engaging in earnings management. Furthermore, improved reporting readability among treated firms can be partially attributed to alleviated concerns about the adequacy of cautionary language, as evidenced by a significant decrease in negative forward-looking statements, particularly risk-related ones. Collectively, our findings suggest that securities litigation risk contributes to reduced readability in financial reporting.
Keywords
forward-looking statements, litigation risk, Ninth Circuit, plain English, readability
Discipline
Accounting | Corporate Finance | Finance and Financial Management
Research Areas
Corporate Governance, Auditing and Risk Management
Publication
Contemporary Accounting Research
First Page
1
Last Page
34
ISSN
0823-9150
Identifier
10.1111/1911-3846.13027
Publisher
Wiley
Citation
FU, Siwen; WANG, Ke; ZHANG, Liandong; and ZHENG, Liu.
Bogging down investors: An unintended consequence of litigation risk. (2025). Contemporary Accounting Research. 1-34.
Available at: https://ink.library.smu.edu.sg/soa_research/2077
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/10.1111/1911-3846.13027
