Abstract
<p>Prior research has established that stock price declines are a significant driver for filing securities class action lawsuits. There is a continued debate as to the relative importance of case merit in the decision to file a case and the dispute outcome. The author used accounting quality variables as proxies for managerial wrongdoing and test whether accounting quality is a determinant of lawsuit filing decisions and if it can distinguish frivolous cases from those with merit. The results show that accounting quality, measured by accrual reliability, discretionary accruals, one-time charges, and reporting opacity in relation to R&D and intangible assets, significantly impact the decision to file a lawsuit and the magnitude of settlement. These ex ante measures of accounting quality serve as leading indicators of case outcomes even after controlling for return performance and hard evidence events such as restatements and SEC investigations. Findings suggest that accounting data is used by the legal system as a determinant of lawsuit filings and outcomes.</p>