Disclosure Tone and Shareholder Litigation

Abstract

Abstract:We examine the relation between disclosure tone and shareholder litigation for a sample of firms involved in class action securities litigation. Specifically, we use text analysis software to investigate whether sued firms' earnings announcements are systematically more optimistic in tone than a sample of non-sued firms in similar economic circumstances and industries. We find that disclosures issued by sued firms during the class action damage period are significantly more optimistic than those of non-sued firms. We also provide evidence that plaintiffs explicitly target the more optimistic disclosure language within earnings announcements when initiating shareholder lawsuits. Finally, we find that managers of sued firms issue more forecasts than their non-sued counterparts. In total, our results are consistent with the use of optimistic language and the issuance of management forecasts increasing firms' likelihood of being sued.

Calisthenics with Words: The Effect of Readability and Investor Sophistication on Investors’ Performance Judgment

“…Conversely, management has incentive to dilute the impact of negative news [1] by presenting the information in a way that is more difficult to understand, in the hopes that investors would have a harder time parsing through verbal calisthenics. In order to accomplish this, managers have been found to simultaneously manipulate both the language sentiment and the readability of disclosures [16,17]. Investors who do not glean the full scope of just how badly the company is doing would of course make a less negative judgment of the company's performance.…”

Contemporaneous verification of language: evidence from management earnings forecasts

“…These cleansed .txt files are used as the basis for the linguistic characteristics extracted from the firm's earnings forecast press releases. 7 Rogers et al (2011) argue that more general language measures such as Diction might be more relevant in the context of communications with nonfinancial audiences such as attorneys, judges, and others. In untabulated analyses described later, we find that, in our sample, the Diction-based linguistic tone measure is not as pricerelevant as the L&M measure and is not price relevant incremental to the L&M measure.…”

Securities Litigation Risk for Foreign Companies Listed in the U.S.

“…For example, Rogers, Van Buskirk and Zechman (2011) find that when management disclosures are unusually optimistic in their tone, these firms are more likely to be sued relative to other similar firms that provide management guidance. Since our interest is in whether management forecasts provide investors the information that will directly affect the ease to which investors can identify and initiate a lawsuit, we focus on quantitative information events rather other qualitative (e.g., optimism of the manager) properties of the management disclosure.…”