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Tone Used In Disclosure Statements Can Affect Susceptibility To Securities Class Actions


The tone public companies use in their disclosure statements can affect the companies' susceptibility to securities class action litigation, according to a recent academic study. The authors found that firms hit with securities litigation generally used more optimistic language in their disclosure statements than did firms that were not sued. Based on these findings, the authors conclude that managing "disclosure tone" could provide "a straightforward means of reducing litigation risk."

In their November 2011 paper "Disclosure Tone and Shareholder Litigation" (here), University of Chicago Business School Professors Jonathan Rogers and Sarah L.C. Zechman and Ohio State Business School Professor Andrew Van Buskirk set out to determine whether or not corporate managers' use of optimistic language increases litigation risk. Using statistical techniques, they examined the extent to which differences in qualitative language are systematically related to differences in litigation risk. 

The authors began by examining a range of plaintiffs' complaints, in order to determine which disclosure channels are likeliest to affect the probability of litigation. Based on their review, the authors determined that the earnings announcements are the most consistently cited type of communication referenced in plaintiffs' complaints.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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