Earnings Surprise, Litigation Risk and Management’s Use of Forward-Looking Statements

This paper examines the effects of earnings surprises and litigation risk on the use and content of forward-looking statements in firms’ press releases. Our results show that firms releasing unfavorable news that are lower than expectations provide more non-forecast-like (i.e., other) forward-looking statements that refer to projections of the firm’s future plans and outlooks. The findings show that the increase is with statements that are mostly qualitative in nature and do not refer explicitly to earnings. While the risk of litigation increases the use of other forward-looking statements but not forecast-like statements, the risk of litigation reduces the disclosure of both types of forward-looking statements by firms with bad news. Our analysis of the content of other forward-looking statements shows firms with unfavorable news use less uncertain tone, more complex words, and refer more to the firms’ innovations. We find that litigation risk is associated with an increase in the discussion of innovation but has no significant effect on the net tone and the use of complex or uncertain words