The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information By High Technology Firms

This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using a sample of 523 computer hardware, computer software, and pharmaceutical firms, we find a significant increase in both the frequency of firms issuing earnings and sales forecasts and the mean number of forecasts issued following the Act's passage. To provide more direct evidence that our findings are attributable to the Act reducing firms' legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms' ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward-looking information. Forecast errors, whether directional or non-directional, were not significantly affected by the Act's passage.