Congratulations to Prof. Allen HUANG for the paper at Review of Finance
26 Oct 2023

Franke, Benedikt, HUANG, ALLEN, Li, Reeyarn and Wang Hui. "Securities Law Precedents, Litigation Risk, and Misreporting." Review of Finance, Vol. 28, Issue 2, 2024, pp. 413-445.


In common law systems, firms’ litigation risk depends both on written laws and how courts interpret these laws. Using 321 U.S. circuit court rulings, we introduce a novel measure capturing courts’ attitudes towards defendants in securities lawsuits. Our results confirm that financial misreporting firms in more defendant-friendly circuits face fewer lawsuits. Consistent with lower expected litigation costs, firms in these circuits face less negative market reactions when misreporting is revealed, invest less in preventing misreporting, and are more likely to engage in aggressive misreporting. We conclude that defendant-friendly precedents reduce firms’ legal liability and worsen their financial reporting quality.

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