What Corrective-Disclosure Returns Identify in Securities Litigation
Corrective-disclosure price movements are used in securities litigation as evidence of price impact, loss causation, and artificial inflation. Yet the observed return measures the market’s response to what the correction actually reveals, which need not equal what timely truthful reporting would have conveyed.
Atkinson develops a Bayesian reporting model in which a correction reveals both an unfavorable fact and the issuer’s earlier decision to report favorably despite that fact. Because false reporting is selected across issuers, the revealed reporting history can convey adverse, neutral, or favorable information about continuation value. The corrective-disclosure effect can therefore exceed, equal, or fall below artificial inflation, even when the correction precisely negates the earlier statement. Positive front-end price impact can coexist with a zero or positive correction-date return. The model clarifies what corrective disclosure event studies identify and the distinct implications for price impact, loss causation, damages, and disaggregation.
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