Litigation risk, information asymmetry and conditional conservatism

Litigation risk, information asymmetry and conditional conservatism This study examines whether a change in litigiousness explains variations in the relationship between information asymmetry and conditional conservatism. Prior literature documents a positive association between information asymmetry and conservatism. Prior literature also demonstrates that shareholder litigation concerns motivate managers and auditors to be conservative in preparing financial statements. In a more litigious environment, both managers and auditors have incentives to be more sensitive to expected litigation costs which increase with the level of information asymmetry. We hypothesize and find that higher levels of litigiousness enhance the association between information asymmetry and conservatism. This topic is important given the role of conservatism in accounting practice and the recent tendency for standard setters to view conservatism in a negative light. Prior research argues that conservatism is a favorable characteristic in equity markets because of its information role. This study attempts to gain a further understanding of what affects that role. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Litigation risk, information asymmetry and conditional conservatism

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0428-y
Publisher site
See Article on Publisher Site

References

  • Incentives versus standards: properties of accounting income in four East Asian countries
    Ball, RS; Robbin, A; Wu, JS
  • The conservatism principle and the asymmetric timeliness of earnings
    Basu, S
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    Bushman, RM; Piotroski, JD
  • An analysis of the economic consequences of the proportionate liability rule
    Chan, D; Pae, S
  • Managerial legal liability coverage and earnings conservatism
    Chung, HH; Wynn, JP
  • Mandatory IFRS reporting around the world: early evidence on the economic consequences
    Daske, H; Hail, L; Leuz, C; Verdi, R
  • Auditor changes and discretionary accruals
    DeFond, ML; Subramanyam, KR
  • Earnings management, stock issues, and shareholder lawsuits
    DuCharme, LL; Malatesta, PH; Sefcik, SE
  • One day in the life of a very common stock
    Easley, D; Kiefer, NM; O’Hara, M

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