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Study Explores Connection Between “Overly Optimistic” Disclosures and Investor Claims

A recent study published in Accounting Review explored whether firms that use “overly optimistic” language in their disclosures are more likely to be sued by investors. While it is unreasonable to expect a firm to deliberately use language that will cost them business, disclosures should always be grounded in reality — and there is a significant difference between “optimistic” and “overly optimistic.” Overly optimistic disclosures that are not grounded in reality are often cited in securities arbitration claims.

Study Explores Connection Between “Overly Optimistic” Disclosures and Investor Claims

The final sample of the study included 165 lawsuits. All the lawsuits were filed between 2003 and 2008. Types of disclosures that could be viewed as “overly optimistic” included SEC filings, earnings announcements, press releases, presentations at conferences and media interviews. Once the researchers controlled for performance-related and other traits, they found that substantially more optimistic language in disclosures was used by firms that had been sued. According to the authors of the study, “These results indicate a strong link between disclosure tone and litigation. The difference in tone between sued and non-sued firms’ disclosures is consistent with plaintiff allegations that managers issued overly optimistic disclosures during the damage period.”

While a significant portion of securities litigation cases cite material misrepresentations as part of the firm or broker misconduct, “a victorious securities lawsuit requires plaintiffs not only to provide evidence of a material misrepresentation but also to prove intent to deceive,” the authors note.

The study also found a correlation between optimistic disclosures, the probability of being sued and instances of insider trading.

If you have made an investment with a firm that you believe included material misrepresentations in disclosures that were intended to deceive investors, this could be grounds for a fraud investigation, and you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

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