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

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. Using data on earnings and sales forecasts issued by 547 computer, software, and drug firms, we find that there was a significant increase in both the frequency of firms issuing forecasts and the number of forecasts issued following enactment of the Reform Act. The increased level of disclosure is primarily attributable to managers issuing more long horizon forecasts of good news and short horizon forecasts of bad news. Moreover, there is some evidence that the forecasts issued after the safe harbor took effect specified a more precise estimate of expected future earnings performance. We also find that the increase in disclosure was not at the expense of forecast quality in that forecasts issued after passage of the Reform Act are no less accurate than those issued previously. In particular, there is no evidence to support critics' concern that the protection of the safe harbor would prompt managers to issue more overly optimistic statements to investors.

JEL Classification: M41, M43, K22