Combining Bad News with Good News: A Tactic to Deter Shareholder Lawsuit

55 Pages Posted: 6 Aug 2018

Date Written: June 16, 2018

Abstract

This paper examines the disclosure strategy of combining bad news with good news as well as its litigation risk implications. I postulate that in news combination disclosure, negative words about the bad news can serve as meaningful precautionary statements that meet the requirement of the Safe Harbor and deter shareholder lawsuits. Consistent with this postulation, 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 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 the combined disclosure are not followed by bad future performance, and stockholders do not react negatively to the negative words in combined disclosure.

Keywords: Disclosure, Lawsuit, Textual analysis

Suggested Citation

Li, Reeyarn Zhiyang, Combining Bad News with Good News: A Tactic to Deter Shareholder Lawsuit (June 16, 2018). Available at SSRN: https://ssrn.com/abstract=3215408 or http://dx.doi.org/10.2139/ssrn.3215408

Reeyarn Zhiyang Li (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

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