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Issue 5(1), October 2010 -- Paper Abstracts

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JOURNAL OF ACCOUNTING AND FINANCE

Off the Hook: Does the Supreme Court’s Scheme Liability Ruling

Benefit Firms in Litigation-Prone Industries?

Author(s): Candra Chahyadi, Menghistu Sallehu

Citation: Candra Chahyadi, Menghistu Sallehu, (2012) "Off the Hook: Does the Supreme Court’s Scheme Liability Ruling Benefit Firms in Litigation-Prone Industries?," Journal of Accounting and Finance, Vol. 12, Iss. 4, pp. 30 - 48

Article Type: Research paper

Publisher: North American Business Press

Abstract:

This study measures the impact of the U.S. Supreme Court’s 2008 ruling Stoneridge Investment Partners vs. Scientific-Atlanta on the cumulative abnormal returns and changes in bid–ask spread of firms in litigation-prone industries (computer, electronic, pharmaceutical/biotech, and retail industries). Although we find, in general, positive CARs around the event, we posit and find that the conditional probability that a firm will commit an accounting misstatement affects both CAR and bid–ask spread. The results show that firms with a higher probability of committing financial misstatements experience lower returns around the court’s ruling. That is, the ruling increases information asymmetry and uncertainty, and thus costs increase for firms that are more likely to commit financial misstatements, as reflected in a widening of the bid–ask spread.