The Reporting of Contingent Legal Liabilities: Employment Discrimination Lawsuits
Open Access
- Author:
- Hennes, Karen M
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- June 16, 2008
- Committee Members:
- James Mckeown, Committee Chair/Co-Chair
Andrew J Leone, Committee Member
Amy X Sun, Committee Member
Marie Therese Reilly, Committee Member - Keywords:
- contingency
legal liability
disclosure
SFAS 5
employment discrimination
waiver of privilege - Abstract:
- The reporting of contingent legal liabilities is an area where financial reporting standards conflict with legal strategy and policy. There are legal costs associated with the disclosure of pending litigation that make firms reluctant to fully disclose their assessment of legal contingencies. I investigate pending-litigation disclosures in 10-Ks for evidence that current contingent legal liability disclosures convey contingency valuation information to investors or whether the legal environment drives firms to provide only formulaic disclosures with little or no useful information. I find that firms rarely disclose an estimate (either point or range) of the magnitude of the potential loss from litigation. However, I find that textual statements (or the lack thereof) regarding the accrual status of the contingency, the potential materiality of the loss, and the firm's willingness to settle can all be used to form a meaningful prediction of the likelihood of loss in a given suit. I also find that my predicted probability of loss derived from the financial statements is weakly correlated with the market's expected probability of loss, which is consistent with the market using the SFAS 5 disclosures or similar information. These results suggest that the observed compromise between reporting requirements and legal incentives does contain some information relevant and useful for evaluating the loss contingency. This evidence on the strengths and weaknesses of current practice provides investors and standard-setters with a necessary baseline for assessing the potential impact of upcoming revisions to SFAS 5.