How Companies Can Protect Against Securities Class Action Lawsuits Using Risk Factor Disclosure

Securities class action lawsuits are arguably the most significant litigation risk for firms listed in the US, UK, Australia and Canada, with an average settlement of $3.4 billion USD in the US in the last decade. Despite managers’ intention to provide information to investors by discussing forward-looking information, investors often sue companies for providing overly optimistic forecasts when the outcome is negative. Our research shows that managers perceive lower litigation risk in issuing forward-looking information when they disclose sufficiently detailed risk factor disclosures and invoke the safe harbor protection. Firms that consider listing in the United States should provide sufficient risk factor disclosure to avoid becoming targets in securities class action lawsuits.