FINANCIAL MISREPORTING PERIOD AND INVESTOR REACTION TO SECURITIES LITIGATION

This study investigates the relation between financial misreporting period and investor reaction to securities litigation announcement. A sample of 301 securities lawsuits between 1996 and 2005 is used in the regression of investor reaction around securities litigation on financial misreporting period and other variables. A negative relation is reported between financial misreporting period and the investor reaction to securities litigation announcement, which suggests that the longer the concealment period, the more the market perceives a securities fraud lawsuit as being meritorious. Our findings imply that the market losses associated with securities litigation can be mitigated if the misstating firms release negative earnings-related news in a timely manner. The results of this study contribute to our understanding of the investor reaction to securities litigation and also provide support for regulation that enhances the timeliness of material event disclosures.