Rowland K. Atiase
The University of Texas at Austin
Somchai Supattarakul
Thammasat University
Senyo Tse
The University of Texas at Austin
Abstract: This paper provides empirical evidence on the incremental role of shareholder litigation risk on market reaction to earnings surprise warnings. Market reaction to earnings surprise warnings (or market reaction to the act of warnings), i.e., the warning effect, is defined as the incremental price reaction beyond the price reaction associated with earnings news of firms that warn about their earnings surprise. We find the warning effect on bad news (good news) firms to be negative (positive). More importantly, we predict and find that shareholder litigation risk has a positive effect on the warning effect of both good news and bad news firms. Our results suggest that the warning effect on bad new (good news) firms with high shareholder litigation risk is less negative (more positive) than that on bad news (good news) firms with low shareholder litigation risk.
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