Textual Disclosure in SEC Filings and Litigation Risk

Prior studies are quite ambivalent on the relation between disclosure and litigation risk since greater disclosure can be perceived as either ex ante deterrent or ex post misleading. I hypothesize that more information is disclosed in the non-numerical narratives in SEC filings than that has been analyzed in the extant literature. Using a comprehensive hand-collected data on federal securities class action lawsuits spanning nearly two decades, propensity-score matched sample, and widely used measures in natural language processing (NLP) that capture degree, readability and sentiments in textual disclosures, I find results consistent with the theoretical view that argues that more and difficult to comprehend disclosure is often perceived as ex post misleading, hence, precipitating litigations. After controlling for other numerical variables, these results are robust to various empirical specifications using difference-in-differences (DiD) and principal component analysis (PCA). Such findings indicate that there is a need to distinguish between more versus better disclosure.