Abstract

A longstanding puzzle in financial reporting is why managers, despite having the ability to make forward-looking statements in the 10-K and MD&A, often produce highly repetitive disclosures across years that elicit muted investor reactions. We investigate whether litigation risk for omitting information is a missing ingredient in this equilibrium, proposing that when the cost of hiding bad news rises, repetition in MD&A can itself be interpreted as good news because managers with bad news will be compelled to update their MD&A discussion to avoid legal consequences. Exploiting the Second Circuit’s Macquarie Infrastructure v. Moab Partners ruling – which heightened liability for omissions under Item 303 – we test whether litigation risk transforms textual repetition from a sign of boilerplate into a credible signal of favourable prospects. Using a difference-in-differences design, we show that post-ruling, investors respond more positively to textual similarity in MD&A, consistent with repetition becoming more credible once bad news is more costly to conceal. Additional analyses reveal that post-ruling MD&A changes embed stronger information about future earnings and are more salient to investors, as textual revisions are increasingly tied to shifts in tone. Cross-sectional tests show that the effects concentrate among firms in opaque information environments, as well as those with high proprietary costs or weaker incentives to voluntarily reveal favourable news. Overall, our findings suggest that legal forces incentivising managers to disclose bad news can transform seemingly uninformative textual repetition into a tool for credibly communicating with the market.