An analysis of the relevant lawsuits in Brazilian companies: characteristics that influence the change in the probability of loss provision and contingent liabilities

Abstract

The aim of this research is to identify characteristics that influence the change in the probability of provisions and contingent liabilities of Brazilian companies. This has been widely observed in specific industries that disclose more information on provisions and contingent liabilities, namely: oil, gas and biofuels, non-cyclical consumption and public utility. The data consisted of 6,194 observations, of which 2,058 lawsuits were mentioned in more than one period, and there were 228 changes in the probability of loss in the period from 2010 to 2016. A logistic regression model with panel data was applied, counting on 11 explanatory variables for the change in the probability of loss, which are divided into two perspectives: (a) characteristics of the companies and, (b) characteristics of the lawsuits. The results indicate that companies listed as ‘New Market’, ADR issuers, change the audit firms, respond to environmental, labor and civil lawsuits with large amounts in dispute, and have financial materiality in terms of risk expectation regarding losses and the duration of the legal process – are more likely to affect the change in the probability of loss. Conversely, the lawsuits in the first or superior instances are more likely not to change the probability of loss.

Keywords

• Provisions
• Contingent liabilities
• Litigations
• Probability of loss