The quality of disclosure and governance and their effect on litigation risk

This dissertation examines the relationship between three sets of variables: corporate governance and monitoring, the quality of disclosure in annual reports and securities class action litigation. In the first section, I present a game-theoretic model in which shareholders select from ex ante monitoring or ex post litigation mechanisms available to them in order to mitigate the agency problem. Firm characteristics determine the choice of which of these two mechanisms is appropriate for a particular company. I then test predictions from this model and find that firms with poor monitoring are much more likely than those with good monitoring to be sued even after controlling for the common determinants of a lawsuit. The second section of the dissertation relates the quality of disclosure in annual reports to litigation. I use a dataset containing annual reports filed electronically with the SEC in the period 1996-2005. Using two content analysis software programs that analyze the categories of words used in these annual reports, I find that firms that use more numbers, past and future words, and other informative words are much less likely to be sued, even after controlling for the common determinants of lawsuits. In order to avoid subjectively choosing categories, I use principal components analysis to identify the major components of annual report disclosure. When these components are used as regressors to identify causative factors of lawsuits, one component named 'informativeness' has significant power to explain subsequent lawsuits. In head-to-head comparisons of the 'informativeness' principal component with Standard & Poor's Transparency and Disclosure score, my informativeness measure is more effective than the S&P score in predicting the likelihood of a lawsuit. Finally, in cross-sectional tests, I find support for the theory that firms with good boards and managers who are not entrenched have better disclosure practices. Further, monitoring by institutional investors, independent boards and analysts appears to induce better corporate disclosure.

Name thesis:degree_name

Doctor of Philosophy

Level thesis:degree_level

Doctoral

Discipline thesis:degree_discipline

Finance

Grantor

The University of Texas at Austin

Year dc:date.issued

2006

Author dc:creator

• Mohan, Saumya

Advisor dc:contributor.advisor

• Starks, Laura T.

• Corporate governance
• Corporate monitoring
• Quality of disclosure
• Annual reports
• Securities class action litigation
• Litigation risk
• Game theory model
• Lawsuits
• Informativeness

Statement dc:rights

• Copyright is held by the author. Presentation of this material on the Libraries' web site by University Libraries, The University of Texas at Austin was made possible under a limited license grant from the author who has retained all copyrights in the works.

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/2152/29642

OAI identifier oai:identifier

oai:repositories.lib.utexas.edu:2152/29642