Managerial Disclosures and Shareholder Litigation
Posted: 8 Jul 1998
This paper explores the link between shareholder lawsuits brought under Rule 10b-5 of the Securities Exchange Act of 1934 and managerial disclosures of prospective information. Two scenarios are examined. In the first, the manager's information is assumed to be such that there exists an affirmative duty to disclose under Rule 10b-5. In this setting it is shown that the manager will have a tendency to disclose either good news or news that is sufficiently bad. Further, the good news disclosures are expected to be more precise than those that reflect unfavorable information. It is also demonstrated that the probability of the manager making a disclosure will increase with both the precision of his information and the variability of his firm's earnings. In the second scenario, the manager's information is such that there is no affirmative duty to disclose under Rule 10b-5. In this setting, it is predicted that the manager will withhold news that is sufficiently bad and will, in some cases, also withhold good news. Several of these predictions are consistent with documented empirical regularities.
JEL Classification: C60, G38, K22
Suggested Citation: Suggested Citation