| This study examines whether an unexpected shock to the risk of class-action lawsuits filed under securities laws affects the level of discretionary revenues, the market reaction to unexpected revenues, and the likelihood of restatements. I identify a court decision that reduced the risk of shareholder litigation for firms headquartered within a single jurisdiction. Subsequent to the decision, the likelihood of a restatement and the level of discretionary revenues increased while the market reaction to unexpected revenues declined for firms headquartered in this jurisdiction relative to firms headquartered in other jurisdictions. Further, these changes were driven primarily by firms that faced the highest risk of shareholder litigation. Overall, results indicate that the risk of shareholder litigation constrains managers from making opportunistic reporting choices. This study is relevant to the global policy debate about class-action litigation as a mechanism to regulate securities markets. |
