Disclosure and Litigation

by Baruch Lev



Shareholder lawsuits are currently a hot issue. This article compares the characteristics and disclosure policies of companies that were targets of shareholder litigation with those of similarly at-risk companies that were not sued. In contrast to widely held beliefs, a sharp stock price decline does not automatically trigger a lawsuit. Litigation targets experience an abnormally good operating and stock market performance prior to litigation, where the non-sued companies are typically mediocre performers. The litigated companies communicated with investors more extensively than control companies, issuing more optimistic announcements but fewer warnings of forthcoming disappointments. Moreover, as a group, the litigated companies did not resume their high-flying performance after litigation. Shareholder litigation should be viewed as a potential cost of disclosure, however it does not overshadow the considerable benefits of an active disclosure policy.

California Management Review

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