Litigation Risk and Voluntary Disclosure: The Use of Meaningful Cautionary Language

55 Pages Posted: 7 Jul 2007

See all articles by Karen K. Nelson

Karen K. Nelson

Texas Christian University - Department of Accounting

Adam C. Pritchard

University of Michigan Law School

Date Written: August 2007

Abstract

This study investigates firms' voluntary disclosure of cautionary language under the safe harbor of the Private Securities Litigation Reform Act of 1995. We examine three disclosure attributes indicative of meaningful cautionary language under the statute. Consistent with predictions, we find that firms subject to greater litigation risk disclose more cautionary language, update the disclosure more from year-to-year, and use more readable language. The response to changes in litigation risk is asymmetric; firms increase their use of cautionary language when litigation risk increases but do not remove cautionary language when litigation risk decreases. Taken together, our evidence suggests that firms adopt disclosure policies to reduce the expected costs of litigation.

Keywords: Voluntary disclosure, litigation risk, safe harbor, forward-looking information

JEL Classification: M41, M45, K22

Suggested Citation

Nelson, Karen K. and Pritchard, Adam C., Litigation Risk and Voluntary Disclosure: The Use of Meaningful Cautionary Language (August 2007). 2nd Annual Conference on Empirical Legal Studies Paper, Available at SSRN: https://ssrn.com/abstract=998590 or http://dx.doi.org/10.2139/ssrn.998590

Karen K. Nelson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Adam C. Pritchard

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

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