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We examine the relation between disclosure tone and shareholder litigation to determine whether managers' use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms' earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimistic language increasing litigation risk. In addition, we find incrementally greater litigation risk when managers are both unusually optimistic and engage in abnormal selling. This finding suggests that firms can mitigate litigation risk by ensuring that optimistic statements are not contradicted by insider selling. Finally, we find that insider selling is associated with litigation risk only when contemporaneous disclosures are unusually optimistic. JEL Classifications: G38; K22; M41; M48. Data Availability: Data are available from sources indicated in the text.

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We find mixed support for the hypothesis that a "New Economy" subperiod occurred in the late 1990s in which the relation between equity value and traditional financial variables differs from previous periods. We examine a regression model of equity value on financial variables over 25 years for a broad firm sample and for firm subsamples thought to be emblematic of the New Economy. We find the regression model's explanatory power declined in the New Economy subperiod for all firm subsamples. However, for all subsamples, the regression model's structure during the New Economy subperiod is not unusual compared to other subperiods. MARKET VALUATIONS IN THE NEW ECONOMY: AN INVESTIGATION OF WHAT HAS CHANGED AbstractThe acceleration of globalization combined with rapid advances in technology and the growing importance of the Internet have led many researchers and practitioners to suggest that a "New Economy" has evolved in which equity valuation is different than in previous periods. We examine the explanatory power and stability of a regression model of equity value on traditional financial variables for a broad sample of firms over the past 25 years and investigate how equity valuation has changed in the recent New Economy sub-period. We also examine subsamples of high-technology firms, young firms, and young firms with losses that are thought to be emblematic of the New Economy. We find that the explanatory power of the regression model declined in recent years for all subsamples of firms. However, for all subsamples of firms, we find that the structure of the regression model is quite stable during the New Economy subperiod, as compared to other sub-periods. Together, these results suggest that traditional explanatory variables of equity value remain applicable to firms in the New Economy subperiod, but that there is greater variation remaining to be explained by uncorrelated omitted factors.JEL Classifications: G1, M4 1 IntroductionEquity valuation is one of the most widely researched topics in accounting and Francis andSchipper (1999), andZarowin (1999) that examine a general trend in the value relevance of accounting information over time. In contrast to these studies, we make no prediction on the trend in explanatory power prior to the NEP.Instead, we examine the data for a shift in financial information's ability to explain firm valuation during the NEP, and a shift in the ability of prior periods' coefficients to fit out-1 Our finding of greater unexplained variation around a stable relation between equity value and traditional financial variables is similar in spirit to the Francis and Schipper (1999, p. 341) argument that increases in volatility could reduce explained variation even though there is no change in the properties of accounting information.4 of-sample NEP data. Finally, in addition to current period earnings and book value, our set of explanatory variables includes proxies for expected growth in profitability.The next section provides background on the NEP. We develop our hypothesis ...