Earnings quality and Rule 10b-5 securities class action lawsuits

Abstract

This study examines the earnings quality of firms sued under accounting-related Rule 10b-5 securities fraud class action lawsuits, following a decline in their stock prices, relative to earnings quality of a return-matched control sample of firms. Our analysis is conducted in pre- and post-Private Securities Litigation Rule Act (PSLRA) periods. We measure accruals (earnings) quality using the Dechow and Dichev (2002) model, and provide evidence of significantly lower quality earnings (earnings overstatement) in both the pre- and post-PSLRA periods, for the test sample firms in the four quarters immediately prior to the sued quarter, followed by a sharp decline in the level of earnings of the..