Disclosure Tone and Shareholder Litigation

51 Pages Posted: 23 Jan 2009 Last revised: 1 Nov 2011

See all articles by Jonathan L. Rogers

Jonathan L. Rogers

University of Colorado at Boulder - Leeds School of Business

Andrew Van Buskirk

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

Abstract

We examine the relation between disclosure tone and shareholder litigation to determine whether managers’ use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms’ earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimistic language increasing litigation risk. In addition, we find incrementally greater litigation risk when managers are both unusually optimistic and engaging in abnormal selling, consistent with insider sales signaling an intent to mislead underlying the manager’s optimistic statements. Finally, we find that insider selling is associated with litigation risk only when contemporaneous disclosures are unusually optimistic.

Keywords: Securities litigation, disclosure, tone, earnings announcements, insider trading

JEL Classification: G38, K22, M41, M45

Suggested Citation

Rogers, Jonathan L. and Van Buskirk, Andrew and Zechman, Sarah L. C., Disclosure Tone and Shareholder Litigation (May 1, 2011). Chicago Booth School of Business Research Paper No. 09-01, AAA 2010 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1331608 or http://dx.doi.org/10.2139/ssrn.1331608

Jonathan L. Rogers

University of Colorado at Boulder - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

Andrew Van Buskirk (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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