We provide empirical evidence that incremental to the commonly used industry-based proxy for litigation risk and firm-level attributes, managerial ability in transforming corporate resources into revenues is associated with lower risk of litigation arising from financial reporting. The negative relation between managerial ability and litigation risk does not seem to stem from more frequent disclosure of bad news. Instead, our results suggest that high ability managers are less likely to engage in opportunistic financial reporting, i.e., lower financial statement errors and abnormal revenues. The contribution of our study is to explicitly offer a managerial human capital perspective in explaining variations in litigation risk related to financial reporting.

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