Andrew Van Buskirk

Disclosure Tone and Shareholder Litigation

We examine the relation between disclosure tone and shareholder litigation to determine whether managers’ use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms’ earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimistic language increasing litigation risk. In addition, we find incrementally greater litigation risk when managers are both optimistic and engaging in abnormal selling, consistent with insider selling providing evidence that the managers optimistic statements were intended to mislead. Finally, we find that insider selling is associated with litigation risk only when contemporaneous disclosures are unusually optimistic.

Volatility Skew, Earnings Announcements, and the Predictability of Crashes

This paper examines the relation between firm-level implied volatility skew and the likelihood of extreme negative events, or crash risk. I show that volatility skew identifies which firms are likely to experience crashes, but only in short-window earnings announcement periods. The predictive power is incremental to the information in historical volatility, financial reporting opacity, and even the current period’s earnings surprise. In contrast, volatility skew does not predict crashes outside of earnings periods, even in regressions with few independent variables, and even when those periods include management earnings forecasts. At best, volatility skew contains modest information about future price declines, but only when looking at cumulative returns over several months. While prior research concludes that volatility skew contains information about future earnings shocks, these results indicate that, outside of quarterly earnings announcements, option investors have difficulty predicting when the adverse earnings news will be revealed.

Event-Specific Uncertainty and its Expected Resolution

Disclosure models predict stronger responses to new information when investors are more uncertain prior to the announcement of that information, and that returns will be concentrated in periods in which uncertainty is expected to be resolved. Yet empirical tests of these predictions have generated only modest support. We hypothesize that investor response to new information will depend upon the combined effect of uncertainty about the disclosed information and the extent to which that information will resolve uncertainty about firm value; we term the combined effect “event-specific uncertainty”. We examine investor response to earnings announcements, and find that investors respond more strongly when event-specific uncertainty is higher. We then show that a larger proportion of annual returns are realized during earnings announcement periods that are characterized by relatively higher ex ante event-specific uncertainty. Importantly, other measures of uncertainty do not demonstrate these results. Finally, we show that relative ex ante event specific uncertainty varies intuitively with the characteristics of a firm’s information environment.