Disclosure of Protected Forward Looking Statements

By Daniela De la Parra , Maclean Gaulin , and K. Ramesh
Working Paper: 2020-02-15

We provide the first examination of the determinants of firms' decision to use a list of keywords in SEC filings to identify forward-looking statements and obtain 'safe harbor' protection under the Private Securities Litigation Reform Act. We show that proxies for ex ante litigation risk, disclosure supply, economic uncertainty, and disclosure herding are strongly associated with the decision to include the keyword list. In addition, when we examine the determinants of the number of keywords, we find that both structural variables and proxies for transient forces are statistically significant, with the latter being consistent with lower disclosure costs. Finally, using exploratory factor analysis, we identify five disclosure attributes that capture the most frequent keywords that managers choose. We find that managers use specific keywords that evolve over time, potentially to tailor the language of their forward-looking statements to reflect the economic circumstances they face. Together this evidence provides an important first look at the determinants of firms' decisions regarding a central feature of 'safe harbor' protection.