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12 Va. L. & Bus. Rev. 321 (2017-2018)
Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used against You

handle is hein.journals/valbr12 and id is 326 raw text is: VIRGINIA LAW & BUSINESS REVIEW VOLUME 12 WINTER 2018 NUMBER 2 ACCOUNTING FOR CONTINGENT LITIGATION LIABILITIES: WHAT YOU DISCLOSE CAN BE USED AGAINST YOU Linda Allent ABSTRACT In order to anayefirm value, investment analysts require information on potential losses from contingent abiities such as Rtigation damages. However, revelation of the firm's private estimates of the probabity of loss and possible legal damages can be detrimental to the firm by increasing the costs of settlement. That is, opposing counsel may utiliZe the firm's financial disclosures about contingent Rtigation costs to drive settlement demands. Thus, firms choose to shirk their responsibiities to disclose material Rtigation labilties in their financial disclosures. Financial disclosures thereby contain insufficient information about the monetary value ofpotential Rtigation damages even for large cases with material Rtgation risks. This outcome is harmful to investors and management alke. I propose an accounting regulatoy disclosure model that uses pubcly- available data to provide noisy, but useful estimates of class action securities btigation damages in fraud on the market cases that does not require full disclosure of sensitive private information about the firm's internal assessment of itigation merits. However, a collective action constraint prevents firms from voluntarily utili ng this information- t William F. Aldinger Chair in Banking and Finance, Zicklin School of Business, Baruch College, CUNY. I am thankful for helpful comments from Hagit Levy, Laureen Maines, Huang Rong, Yakun (Eric) Wang, Jianming Ye, and the participants at the Four Schools Joint Conference at the Xiamen National Accounting Institute, China. Of course, all remaining errors are my own. I acknowledge the financial support of the Wasserman Summer Research Award I received in association with this scholarship. Copyright 0 2018 Virginia Law & Business Review Association 321

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