Building a Safe Harbor for Whom? A Look at Cautionary Disclaimers and Investors' Reactions to Forward-Looking Statements

Abstract

We examine investor perceptions of forward-looking statements in the presence and absence of cautionary disclaimers about forward-looking statements. Using two experiments, we first show that nonprofessional investors are largely credulous of forward-looking statements when a cautionary statement is omitted from an earnings press release. In addition, although including a cautionary disclaimer lowers their explicit perceptions of whether they can rely on the information in the press release, investors’ valuation judgments do not indicate a significant reduction in actual reliance. In Experiment 2, we explore additional ways to increase the impact of cautionary disclaimers, and we find that cautionary disclaimers which discuss specific risks at the end of a disclosure lead to the greatest reduction in investors’ explicit perceptions of reliability. However, we again find cautionary disclaimers to be much less effective in reducing actual reliance compared to their impact on investors’ beliefs about reliance. As such, our results raise questions about the merit of granting (denying) safe harbor to management on the basis of having provided (omitted) cautionary disclaimers that do little to induce caution among investors.