Disclosure of pending lawsuits and bond terms

• Main Author: LOU, Yun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Pending Lawsuits; Bond Terms; Default Clauses; Accounting; Corporate Finance; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/soa_research/1731; https://ink.library.smu.edu.sg/context/soa_research/article/2758/viewcontent/Disclosure_of_Pending_Lawsuits_pp.pdf
• Institution: Singapore Management University

I examine the effect of the disclosure of pendinglawsuits in 10-K/Q filings on the contractual terms of newly issued bonds. Ifind that firms’ decision to disclose pending lawsuits and the amount ofdisclosed information (i.e., the level of disclosure) have opposite effects.Specifically, firms that disclose a higher proportion of their pending lawsuitsface higher yields and are more likely to include default clauses pertaining tocourt judgments in the bond prospectuses. However, within the subsample offirms that disclose their lawsuits, I find that firms with a higher level of disclosureregarding their pending lawsuits are rewarded with lower yields. This evidencesuggests that bond investors interpret the decision to disclose pendinglawsuits as a sign that the potential losses due to these lawsuits are materialand reasonably possible and thus demand more stringent bond terms. However, bondinvestors associate a higher level of disclosure with a lower likelihood ofwithholding bad news and thus accept lower yields.