Disclosure Tone and Shareholder Litigation
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 Chicago - Booth School of Business
November 1, 2011
Accounting Review, Vol. 86, No. 6, 2011
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 engage in abnormal selling. This finding suggests that firms can mitigate litigation risk by ensuring that optimistic statements are not contradicted by insider selling. Finally, we find that insider selling is associated with litigation risk only when contemporaneous disclosures are unusually optimistic.
Number of Pages in PDF File: 51
Keywords: Securities litigation, disclosure, tone, earnings announcements, insider trading
JEL Classification: G38, K22, M41, M48
Date posted: November 2, 2011
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