Shareholder Litigation and Changes of Tone in Disclosure Behavior

• In Event: Financial Accounting and Reporting 3

Abstract

I examine changes of disclosure behavior on management’s qualitative statements after the Private Securities Litigation Reform Act of 1995 (PSLRA) to understand management’s response to these legal actions. Even though under the PSLRA forward-looking statements are often considered too soft to be material, still the SEC and federal courts have treated forecasts and general expressions of optimism as actionable under the federal securities law. By tracing the changes of management’s optimistic tone and cautionary languages in their disclosures after suit filings, this study will add insight into if and how not only management but also shareholders consider qualitative disclosures as material. The empirical results from the number of positive words, uncertain words, and FOG index for readability present that sued firms tend to change their qualitative information during sued filing period, but those changes are only temporarily. In addition, the tone of optimism is changed more than the cautionary languages, so this indicates that management experienced lawsuits is not likely to consider the safety harbor protection under PSLRA is effective to prevent potential lawsuits.

Author

• Kyunghee Yoon, Rutgers Business School