Private Litigation Costs and Voluntary Disclosure: Evidence from Foreign Cross-listed Firms

Prior research on the litigation-disclosure relation has generated inconclusive evidence. We use a natural experiment, the Supreme Court Ruling in Morrison v. National Australia Bank and the subsequent Dodd-Frank Act to provide new insights into this relation. These regulatory changes reduced the expected private litigation costs of foreign cross-listed firms by eliminating the right of shareholders who purchased shares on non-US exchanges to seek compensation in US courts. We analyze changes in voluntary disclosure behavior for these firms using empirical specifications that utilize the varying impact of Morrison based on both firm- and country-level attributes. We find consistent evidence that a reduction in expected private litigation costs leads to a reduction in voluntary disclosure, and that this reduction is primarily attributable to a reduction in bad news disclosures. These results suggest that there is a positive association between expected private litigation costs and voluntary disclosure that does not depend on the direction of the news.

This seminar is organised by the Erasmus Accounting Research Group.