| Watts (2003. Conservatism in accounting part I: Explanations and implications. Accounting Horizons 17 (September): 207-221.) and others argue that litigation is one of the primary reasons that managers choose to report more conservatively. This argument is based on the belief that there is a relation between conservative financial reporting and litigation costs. In this paper, I test whether that association exists; I test whether there is a relation between the degree of accounting conservatism and ex post litigation outcomes. I control for ex ante litigation risk and test whether managers who choose to report more conservatively experience: (1) less ex post realized securities litigation, (2) higher incidences of lawsuits being dismissed, (3) lower settlement values, and (4) less negative stock returns around litigation filings. I provide some evidence that accounting conservatism is associated with lower incidences of securities litigation, higher dismissal rates, and less negative stock returns around litigation filings. I do not find that greater accounting conservatism is associated with lower settlement values. |
