The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High Technology Firms

Posted: 23 Jun 2006

See all articles by Marilyn F. Johnson

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems

Ron Kasznik

Stanford Graduate School of Business

Karen K. Nelson

Texas Christian University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Abstract

This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Based on an analysis of earnings and sales forecasts issued by 523 computer hardware, computer software, and pharmaceutical firms, and controlling for other factors that may affect the disclosure decision, we find a significant increase in both the frequency of firms issuing forecasts and the mean number of forecasts issued following the Act's passage. To provide more direct evidence that our findings are attributable to the Act reducing firms' legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms' ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward-looking information released by management, contrary to claims made by opponents of the Act. In particular, our results indicate that forecast errors, whether directional or non-directional, were not significantly affected by the Act's passage.

JEL Classification: M41, M43, K22

Suggested Citation

Johnson, Marilyn F. and Kasznik, Ron and Nelson, Karen K., The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High Technology Firms. Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=200086

Marilyn F. Johnson (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-0152 (Phone)
517-432-1101 (Fax)

Ron Kasznik

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-9740 (Phone)
650-725-6152 (Fax)

Karen K. Nelson

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)

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