The Spillover of Shareholder Litigation Risk and Corporate Voluntary Disclosure

We study how the spillover of peer firms’ litigation risk affects a focal firm’s voluntary disclosure. We find that focal firms facing greater litigation risk spillovers reduce disclosure activities by lowering both the likelihood of issuance and the frequency of management earnings forecasts. We show that the effect is likely causal using a difference-in-differences design where an unanticipated court ruling significantly reduces certain firms’ exposure to peers’ litigation risk spillover. Further analyses suggest that cross-ownership of institutional investors is a potential mechanism through which the diffusion of litigation risk externalities occurs