Disclosing Adverse Earnings News and Litigation: The Importance of Large Market Declines

February 26, 2014 Leave a comment

Disclosing Adverse Earnings News and Litigation: The Importance of Large Market Declines

Dain C. Donelson 

University of Texas at Austin – McCombs School of Business

Justin Hopkins 

University of Virginia – Darden Graduate School of Business Administration
January 27, 2014
Darden Business School Working Paper No. 2386099

Abstract: 
This study examines the legal consequences of disclosing adverse news after hours or disclosing during large market declines. The probability of litigation rises to 0.28% (from 0.16%), and settlements increase 50% over the median (by $1.7 million) when disclosure occurs during a large market decline. Disclosures issued after hours are also more likely to trigger litigation (0.36% versus 0.17%), but this is because managers disclose more adverse news during this period. In supplemental tests, we find no evidence that the timing of firm disclosures affects dismissals, or that managers delay disclosures to avoid days with large market declines. The latter result could be attributable to managers not recognizing the legal consequences to disclosing adverse news on a day where the market declines significantly because legal standards suggest that broader market forces should have no bearing on the outcome of securities litigation.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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