Disclosure Timeliness, Insider Trading Opportunities and Litigation Consequences

Abstract

Prior work indicates that less timely disclosure of negative earnings news increases firms' litigation consequences. Yet, managers' negative news warnings occur relatively infrequently. In this paper, I investigate whether managers' disclosure delays relate to the opportunity to decrease their equity position in the firm and, if so, whether this trading behavior is associated with increased litigation consequences. I find that the managers who are less timely in their disclosure of negative news are more likely to have engaged in abnormal trade prior to the market's receipt of the negative news and that this trading behavior is associated with increased litigation consequences for the firm. Further analysis detects limited repercussions for the managers involved in the trading. Collectively, my findings suggest that research examining managers' disclosure behavior, particularly studies that consider managers' disclosure behavior in the litigation setting, should take into account the influence of managers' trading behavior on both their disclosure decisions and firms' litigation consequences.