Does Securities Class Action Encourage Accounting Conservatism?

This paper examines the impact of litigation risk on accounting conservatism using the two-phase enactment of Securities Class Action in Korea. Using the sample of firms listed on KOSPI and KOSDAQ from 2002 to 2010, we demonstrate that the increased legal risk subsequent to the implementation of Securities Class Action encourages managers to adopt a more conservative financial reporting. In addition, we find that the increase in accounting conservatism following Securities Class Action enactment is more pronounced for the firms with higher agency costs, older CEOs, non-Big 4 auditors, and during the period of heightened economic policy uncertainty.