Disclosure Quality And Its Effect On Litigation Risk

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Executive Summary

This paper examines the relationship between the quality of disclosure in companies' 10-K filings and the risk of securities class action litigation. The author uses a dataset containing 10-K documents filed electronically with the SEC in the period 1996-2005. Using two content analysis software programs that analyze the categories of words used in these filings, the author finds that firms that use more numbers, past and future words, and other informative words are less likely to be sued, even after controlling for the common determinants of lawsuits.

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