Journal article
Fair Value Accounting Standards and Securities Litigation
Journal of accounting & economics, Vol.79(1), 101705
02/2025
DOI: 10.1016/j.jacceco.2024.101705
Abstract
We examine the effect of fair value standards on firms’ litigation risk. The discretion required by fair value allows plaintiffs to “second guess” managers’ judgments, potentially increasing litigation risk. Alternatively, the complexity of fair value may decrease litigation risk if it’s more difficult to demonstrate scienter. Our evidence suggests firms that rely more on fair value standards are relatively less likely to be sued. We find no evidence of a relation between fair value and the risk of misstatements or fraud, but do find evidence of a slight increase in firms’ litigation risk via an increase in volatility. However, the primary effect of fair value standards in reducing litigation risk dominates the volatility effect. Finally, we find average litigation rates increase after the passage of new standards, but less so for fair value standards. On balance, our evidence suggests fair value is a relatively low litigation risk area in GAAP.
•Fair value accounting is becoming more common•We know less about the effect of fair value on other uses of accounting, such as litigation•Sound arguments suggest countervailing effects of fair value accounting on litigation risk•We examine whether greater reliance on fair value accounting is associated with litigation risk•We examine whether reliance upon fair value standards increases or decreases the likelihood of a restatement or fraud•We examine whether the passage of new fair value standards increases absolute litigation risk for all firms•We provide evidence that suggests fair value standards are a relatively low litigation risk area of GAAP.
Details
- Title: Subtitle
- Fair Value Accounting Standards and Securities Litigation
- Creators
- Musaib Ashraf - Michigan State UniversityDain C. Donelson - University of IowaJohn McInnis - The University of Texas at AustinRichard D. Mergenthaler - Pennsylvania State University
- Resource Type
- Journal article
- Publication Details
- Journal of accounting & economics, Vol.79(1), 101705
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jacceco.2024.101705
- ISSN
- 0165-4101
- eISSN
- 1879-1980
- Language
- English
- Electronic publication date
- 06/08/2024
- Date published
- 02/2025
- Academic Unit
- Accounting
- Record Identifier
- 9984644459902771
Metrics
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