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Managerial reporting, overoptimism, and litigation risk


  • Laux, Volker
  • Stocken, Phillip C.


We examine how the threat of litigation affects an entrepreneur's reporting behavior when the entrepreneur (i) can misrepresent his privately observed information, (ii) pays legal damages out of his own pocket, and (iii) is optimistic about the firm's prospects relative to investors. We find higher expected legal penalties imposed on the culpable entrepreneur do not always cause the entrepreneur to be more cautious but instead can increase misreporting. We highlight how this relation depends crucially on the extent of entrepreneurial overoptimism, legal frictions, and the internal control environment.

Suggested Citation

  • Laux, Volker & Stocken, Phillip C., 2012. "Managerial reporting, overoptimism, and litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 577-591.
  • Handle: RePEc:eee:jaecon:v:53:y:2012:i:3:p:577-591 DOI: 10.1016/j.jacceco.2012.02.001

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    References listed on IDEAS

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    Cited by:

    1. Li, Xingli & Pukthuanthong, Kuntara & Glenn Walker, Marcus & Walker, Thomas John, 2016. "The determinants of IPO-related shareholder litigation: The role of CEO equity incentives and corporate governance," Journal of Financial Markets, Elsevier, vol. 31(C), pages 81-126.
    2. Jeremy Bertomeu & Edwige Cheynel, 2016. "Disclosure and the Cost of Capital: A Survey of the Theoretical Literature," Abacus, Accounting Foundation, University of Sydney, vol. 52(2), pages 221-258, June.

    More about this item


    Mandatory disclosure; Litigation; Overoptimism;

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting


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