Essay 1: Litigation Risk and Voluntary Disclosure via 8-K Filings

This paper studies how litigation risk affects the firm’s voluntary disclosure via 8-K filings to the SEC. I use the political party affiliation of federal court judges as an instrument to measure the firm’s litigation risk. Using this approach, I find that with a higher litigation risk exposure, firms make fewer voluntary disclosures via SEC’s Form 8-K. The effect on disclosure is stronger among large firms, as large firms have “deep pockets” are more affected by litigation risks, and make fewer disclosure as a result. Besides, the effect is stronger for disclosure that contains material forward-looking earnings information, consistent with the notion that litigation is of a greater concern for disclosure of earn...[ Read more ]

Essay 1: Litigation Risk and Voluntary Disclosure via 8-K Filings

This paper studies how litigation risk affects the firm’s voluntary disclosure via 8-K filings to the SEC. I use the political party affiliation of federal court judges as an instrument to measure the firm’s litigation risk. Using this approach, I find that with a higher litigation risk exposure, firms make fewer voluntary disclosures via SEC’s Form 8-K. The effect on disclosure is stronger among large firms, as large firms have “deep pockets” are more affected by litigation risks, and make fewer disclosure as a result. Besides, the effect is stronger for disclosure that contains material forward-looking earnings information, consistent with the notion that litigation is of a greater concern for disclosure of earnings related material information.

Essay 2: Combining Good News with Bad News: A Tactic to Deter Strike Suits

This paper investigates the combination of good news and bad news in firm’s forward-looking disclosure. I posit that negative words used in news combination can serve as meaningful precautionary statements that meet the requirement of the Safe Harbor and deter shareholder lawsuits. Consistent with this explanation, I find that press releases with more negative words in news combination sentences are associated with a lower rate of lawsuit filings. The lawsuit deterrence effect is stronger for firms that are more profitable, financially healthier, and with a faster sales growth, suggesting that the deterrence is through reducing frivolous strike suits targeting at the innocent and good firms. I also find that firms are more likely to use combined disclosure when facing a higher litigation risk in ex ante. Additional tests show that negative words used in combined disclosure are not followed by bad future performance, and stockholders do not react negatively to the negative words in combined disclosure.