The impact of shareholder litigation risk on income smoothing

Li, Yiwei; Song, Wei; Sun, Tingyu; Zhang, Qingjing

Abstract

This paper investigates whether and how shareholder litigation influences income smoothing. Using the ruling of the Ninth Circuit Court of Appeals in 1999 as an exogenous shock to the threat of litigation, we find that the increasing difficulty of class action lawsuits decreases income smoothing. This finding is robust to different model specifications. We also show that such an effect is stronger for firms that are more likely to face greater pressure from the threat of shareholder litigation risk. Overall, our findings extend the literature on investigating how class action lawsuits can affect the motivation of income smoothing.

Citation

Li, Y., Song, W., Sun, T., & Zhang, Q. (2023). The impact of shareholder litigation risk on income smoothing. Review of Quantitative Finance and Accounting, 61(4), 1379-1413. https://doi.org/10.1007/s11156-023-01193-w

• Journal Article Type: Article
• Acceptance Date: Aug 14, 2023
• Online Publication Date: Sep 11, 2023
• Publication Date: Sep 11, 2023
• Deposit Date: Sep 18, 2023
• Publicly Available Date: Sep 28, 2023
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer Science and Business Media LLC
• Peer Reviewed: Peer Reviewed
• Volume: 61
• Issue: 4
• Pages: 1379-1413
• DOI: https://doi.org/10.1007/s11156-023-01193-w
• Keywords: Shareholder litigation, Income smoothing, K22, M41, Earnings volatility, Class action lawsuits
• Public URL: https://nottingham-repository.worktribe.com/output/25361977
• Publisher URL: https://link.springer.com/article/10.1007/s11156-023-01193-w
• Additional Information: Accepted: 14 August 2023; First Online: 11 September 2023; : ; : The authors have no conflicts of interest to declare that are relevant to the content of this article.