Management Forecasts, Litigation Risk, and Regulation FD

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Abstract
We examine the influence of the ex ante risk of class-action securities litigation on firms' decisions to issue management forecasts as well as the characteristics of those forecasts. We model litigation risk using a comprehensive sample of 924 class action lawsuits filed by shareholders in federal courts between 1996 and the first quarter of 2003. We find that high litigation risk firms are only more likely to issue a forecast when the market's expectation of earnings at the beginning of the quarter significantly exceeds the firm's expectation. Otherwise, litigation risk is not associated with the decision to issue a forecast. We further examine the effect of litigation risk on the horizon, precision, and the type of news (good or bad) disclosed in the forecast. After controlling for the self-selection bias associated with the decision to issue a forecast, we find that litigation risk is associated with longer forecast horizons, lower precision, and more bad-news forecasts. In addition, while we document that Regulation FD has significantly affected firms' forecast decisions, it generally has not altered the associations between litigation risk and forecast characteristics, with the exception of quarterly forecast horizons.

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