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

Richard A. Cazier; Kenneth J. Merkley; John S. Treu

doi:10.2308/accr-52443

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

The Accounting Review ◽

10.2308/accr-52443 ◽

2019 ◽

Vol 95 (1) ◽

pp. 31-55 ◽

Cited By ~ 4

Author(s):

Richard A. Cazier ◽

Kenneth J. Merkley ◽

John S. Treu

Keyword(s):

Legal Liability ◽

Safe Harbor ◽

Litigation Risk ◽

Securities Laws ◽

Forward Looking

ABSTRACTPrior research finds that positive tone in firms' qualitative disclosures increases the risk of 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 positive tone in forward-looking qualitative statements is significantly less related to the likelihood of subsequent litigation than is positive tone in 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 positive tone in qualitative forward-looking statements relates positively to subsequent litigation in two U.S. circuits in which court rulings 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.

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Directors’ and Officers’ Legal Liability Insurance, Audit Pricing, and Litigation Risk

SSRN Electronic Journal ◽

10.2139/ssrn.2150286 ◽

2012 ◽

Cited By ~ 1

Author(s):

Hyeesoo Hyun Chung ◽

Stephen A. Hillegeist ◽

Jinyoung Park Wynn

Keyword(s):

Legal Liability ◽

Liability Insurance ◽

Litigation Risk ◽

Audit Pricing ◽

Directors And Officers

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Litigation Risk, Audit Quality, and Audit Fees: Evidence from Initial Public Offerings

The Accounting Review ◽

10.2308/accr.2008.83.5.1315 ◽

2008 ◽

Vol 83 (5) ◽

pp. 1315-1345 ◽

Cited By ~ 227

Author(s):

Ramgopal Venkataraman ◽

Joseph P. Weber ◽

Michael Willenborg

Keyword(s):

Earnings Management ◽

Initial Public Offerings ◽

Audit Quality ◽

Audit Fees ◽

Legal Liability ◽

Litigation Risk ◽

Substantial Portion ◽

Public Offerings ◽

Offering Price ◽

Robust Evidence

ABSTRACT: We use the IPO setting to examine the relation between auditor exposure to legal liability and audit quality and audit fees. With regard to audit quality, we report robust evidence that pre-IPO audited accruals are negative and less than post-IPO audited accruals. In contrast to extant literature, our findings provide scant support for the inference that auditors acquiesce to opportunistic earnings management by issuers in an attempt to increase the offering price. With regard to audit fees, we find auditors earn higher fees for IPO engagements than post-IPO engagements. While inherent differences in auditor responsibilities between IPO audits and post-IPO audits should lead to higher fees for IPOs, a substantial portion of IPO audit fees (in levels and changes) is associated with our proxy for the auditor’s 1933 Act exposure. Overall, our results suggest that both audit quality and audit fees are higher in a higher-litigation regime, consistent with the effects an increase in litigation exposure should have on auditor incentives.

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Disclaiming the Future: Investigating the Impact of Cautionary Disclaimers on Investor Judgments Before and After Experiencing Economic Loss

The Accounting Review ◽

10.2308/accr-51924 ◽

2017 ◽

Vol 93 (4) ◽

pp. 81-99 ◽

Cited By ~ 14

Author(s):

H. Scott Asay ◽

Jeffrey Hales

Keyword(s):

Economic Loss ◽

Data Availability ◽

Safe Harbor ◽

Nonprofessional Investors ◽

Ex Post ◽

Investor Judgments ◽

Ex Ante ◽

Before And After ◽

The Impact ◽

Forward Looking

ABSTRACT We examine how cautionary disclaimers about forward-looking statements affect investor judgments both before making an investment and after having suffered an investment loss. In our first experiment, a cautionary disclaimer appears to effectively communicate to nonprofessional investors that forward-looking statements may not be reliable, but we find little evidence that the disclaimer alters the extent to which forward-looking statements influence nonprofessional investors' valuation judgments. In our second experiment, we shift our focus to ex post judgments and find that the disclaimer influences the extent to which investors feel wronged and entitled to compensation after an investment loss, consistent with investors attending to the disclaimer and acting as if it were, ex ante, effective. Notably, investors continue to feel more wronged and entitled to financial compensation when available evidence suggests that management knowingly issued false or misleading forward-looking statements—even if disclaimed. Together, these results provide support for recent judicial efforts to erode the sweeping safe harbor provisions currently granted to companies. Data Availability: Contact the authors.

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Legal Liability Coverage and Voluntary Disclosure

The Accounting Review ◽

10.2308/accr.2008.83.6.1639 ◽

2008 ◽

Vol 83 (6) ◽

pp. 1639-1669 ◽

Cited By ~ 49

Author(s):

Jinyoung Park Wynn

Keyword(s):

Voluntary Disclosure ◽

Insurance Coverage ◽

Legal Liability ◽

Bad News ◽

Litigation Risk ◽

Disclosure Decisions ◽

Excess Cash ◽

Litigation Cost ◽

Directors And Officers ◽

Insurance Data

ABSTRACT: This paper examines whether legal liability coverage, as measured by excess Directors’ and Officers’ (D&O) liability insurance coverage and excess cash for indemnification, is associated with the quantity and the quality of a firm’s voluntary disclosures. Using Canadian firms whose D&O insurance data are publicly available, I find that firms with higher excess coverage are less likely to report bad news forecasts for the sample firms that are cross-listed in the U.S., and that the number of bad news forecasts decreases for large cross-listed sample firms having high litigation risk. The results are consistent with the litigation cost argument for the disclosure of bad news. I also find that higher excess liability coverage leads to disclosures of more precise bad news for the cross-listed sample firms and less timely disclosures of bad news for large cross-listed sample firms. Further, excess cash for indemnification is a more significant determinant of disclosure decisions.

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