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The Effect of CFO Personal Litigation Risk on Firms’ Disclosure and Accounting Choices
Author(s) -
Levy Hagit,
Shalev Ron,
Zur Emanuel
Publication year - 2018
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12378
Subject(s) - accounting , fiduciary , business , litigation risk analysis , shareholder , earnings , duty , corporate governance , finance , law , audit , political science
In Gantler v. Stephens (2009), the Delaware Supreme Court makes explicit that corporate officers owe the same fiduciary duty to the firm and shareholders as do board members. The decision increased the risk of non‐board‐serving officers being added as named defendants to investor litigation but did not change the risk of corporate litigation. Analyzing the effect of the Gantler ruling on non‐board‐serving CFO s, we find a significant change in their behavior as well as in their firms’ disclosure and accounting choices. Specifically, speech tone during earnings calls of non‐board‐serving CFO s becomes more negative when compared to board‐serving CFO s and the firm's CEO , and non‐board‐serving CFO firms disclose bad news earlier and report more conservatively. Results are stronger for firms incorporated in Delaware. Our findings suggest that CFO s respond to personal litigation risk over and above corporate litigation risk.