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<p>We investigate changes in financial reporting conservatism arising from shareholder lawsuits. We find that sued firms respond to 10b-5 litigation with increased accounting conservatism. Consistent with a spillover effect, we also find that non-sued peer firms that share an auditor increase accounting conservatism following litigation. Despite the FASB having eliminated conservatism as an essential qualitative characteristic from the conceptual framework in 2010, we find the post-suit increase in conservatism persists after 2010, suggesting a capital market demand for conservatism even without regulator intervention. Our results, which support the notion that litigation can induce accounting conservatism, extend studies examining the disclosure effects of litigation into the accounting choice effects of litigation.</p>

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Post-litigation reporting conservatism

  • 期刊论文

  • 发表日期：

    2026年3月18日

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  • Frank Heflin,
  • Mark P. Kim,
  • James R. Moon Jr.,
  • Spencer R. Pierce

摘要

We investigate changes in financial reporting conservatism arising from shareholder lawsuits. We find that sued firms respond to 10b-5 litigation with increased accounting conservatism. Consistent with a spillover effect, we also find that non-sued peer firms that share an auditor increase accounting conservatism following litigation. Despite the FASB having eliminated conservatism as an essential qualitative characteristic from the conceptual framework in 2010, we find the post-suit increase in conservatism persists after 2010, suggesting a capital market demand for conservatism even without regulator intervention. Our results, which support the notion that litigation can induce accounting conservatism, extend studies examining the disclosure effects of litigation into the accounting choice effects of litigation.