When are Firms Sued for Qualitative Disclosures? Implications of the Safe Harbor for Forward-Looking Statements

The Accounting Review, Forthcoming

59 Pages Posted: 28 Oct 2016 Last revised: 10 May 2019

See all articles by Richard A. Cazier

Richard A. Cazier

University of North Texas

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

John Treu

West Virginia University - College of Business & Economics

Date Written: January 21, 2019

Abstract

Prior research finds that firms’ qualitative disclosures subject firms to shareholder lawsuits. However, federal securities laws provide a safe harbor intended to shield firms’ forward-looking statements from legal liability. One implication of this safe harbor is that litigation risk potentially varies between qualitative forward and non-forward-looking statements. Consistent with this implication, we find that forward-looking qualitative statements are significantly less related to the likelihood of subsequent litigation than are non-forward-looking qualitative statements. On average, we fail to find a significant association between qualitative forward-looking statements and subsequent litigation. We do find evidence, however, that qualitative forward-looking statements relate positively to subsequent litigation in two U.S. circuits after court rulings in those circuits reduced safe harbor protections for forward-looking statements. Overall, our results are consistent with the safe harbor effectively shielding firms’ qualitative forward-looking statements from litigation risk.

Keywords: Corporate Disclosure, Narrative Disclosure, Disclosure Tone, Litigation, Forward-looking Information

JEL Classification: D82, M40, K41, G30

Suggested Citation

Cazier, Richard A. and Merkley, Kenneth J. and Treu, John, When are Firms Sued for Qualitative Disclosures? Implications of the Safe Harbor for Forward-Looking Statements (January 21, 2019). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2859596 or http://dx.doi.org/10.2139/ssrn.2859596

Richard A. Cazier

University of North Texas ( email )

College of Business Administration
P.O. Box 305219
Denton, TX 76203
United States
940-369-8612 (Phone)

Kenneth J. Merkley (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

John Treu

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

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