Shareholder Litigation and the Information Environment

Reducing the threat of shareholder litigation through securities class actions lowers voluntary disclosure quantity, but not the accuracy of earnings forecasts. Conversely, reducing the threat of shareholder litigation through derivative lawsuits prompts increases in voluntary disclosure quantity and decreases in both earnings forecast accuracy and mandatory disclosure quality. We reconcile these differences by showing that changes to firm operations are the economic mechanism driving changes in corporate information environments after the threat of derivative lawsuits exogenously declines. This evidence comports with the fact that, while securities class action lawsuits address disclosure decisions, derivative litigation also covers decisions about real operations.