Litigation Risk and Voluntary Disclosure: The Use of Meaningful Cautionary Language
Karen K. Nelson
Rice University - Jones Graduate School of Business
Adam C. Pritchard
University of Michigan Law School
2nd Annual Conference on Empirical Legal Studies Paper
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.
Number of Pages in PDF File: 55
Keywords: Voluntary disclosure, litigation risk, safe harbor, forward-looking information
JEL Classification: M41, M45, K22
Date posted: July 7, 2007
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