Voluntary Disclosures,Corporate Control,and Investment

We examine the valuation and capital allocation roles of voluntary disclosure when managers have private information regarding the firm’s investment opportunities, but an efficient market for corporate control influences their investment decisions. For managers with long‐term stakes in the firm, the equilibrium disclosure region is two‐tailed: only extreme good news and extreme bad news is disclosed in equilibrium. Moreover, the market’s stock price and investment responses to bad news disclosures are stronger than the responses to good news disclosures, which is consistent with the empirical evidence. We also find that myopic managers are more likely to withhold bad news in good economic times when markets can independently assess expected investment returns.     

Regulation Fair Disclosure and the timeliness of long-horizon management forecasts

We examine the effect of Regulation Fair Disclosure (hereafter Reg FD) on the timeliness of long-horizon management forecasts of annual earnings, especially those conveying bad news. We expect that managers are less timely in issuing bad news forecasts than good news forecasts prior to Reg FD when they can disclose bad news to selected analysts and institutional investors privately. As Reg FD prohibits private disclosures of material information, managers are expected to accelerate the issuance of long-horizon bad news forecasts after Reg FD due to concerns of litigation risk from institutional investors and loss of analyst coverage, leading to a decrease in timeliness asymmetry between bad news and good news forecasts. We also expect that the effect of Reg FD is stronger among firms with lower ex-ante litigation risk or higher information asymmetry as they are more likely to withhold bad news prior to Reg FD. In addition, we expect that investors and analysts react more to bad news forecasts than to good news forecasts prior to Reg FD, and this asymmetry decreases after Reg FD. Our results are consistent with our predictions and suggest that managers provide long-horizon forecasts conveying bad news more timely after Reg FD.     

Do firms underreport information on cyber-attacks? Evidence from capital markets

Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot discover most cyber-attacks independently, firms may underreport them. Using data on cyber-attacks that firms voluntarily disclosed, and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 3.6% in equity values in the month the attack is discovered, and disclosed attacks with a substantially lower decline of 0.7%. The evidence is consistent with managers not disclosing negative information below a certain threshold and withholding information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (40%) of an attack.     

Do managers withhold bad news from credit rating agencies?

Research documents that managers, on average, withhold bad news and emphasize good news in their public disclosures. We ask whether the same is true in their private communications with credit rating agencies. We study how rating agencies anticipate and react to public information events as a function of their access to rated firms’ private information. We show that, in terms of ratings downgrades, rating agencies exhibit relatively more anticipation and less reaction to negative (compared to positive) public information events when they have more access to private information. Our results are strongest when firms are most optimistic in their public disclosures and are not due to rating agencies focusing their efforts on downside risk. Overall, we find consistent evidence that rated firms provide less optimistic information to rating agencies in their private communications and that this information is reflected in credit ratings.

     

Voluntary Disclosures and Analyst Feedback

We study the resource allocation role of voluntary disclosures when feedback from financial markets is potentially useful to managers in undertaking value maximizing actions. Managers weigh the short‐term price implications of disclosure against the long‐term efficiency gains due to feedback while financial analysts strategically produce information. The model can explain why managers disclose bad information (e.g., grim outlook), that reduces the stock price, and why prices respond more strongly to bad news relative to good news. We find that not all firms enjoy the same quality of feedback, and that feedback, by itself, does not induce more disclosure but less.     

Managerial Disclosures and Shareholder Litigation

This paper explores the link between shareholder lawsuits brought under Rule 10b-5 of the Securities Exchange Act of 1934 and managerial disclosures of prospective information. When the manager's information is such that there is no affirmative duty to disclose under Rule 10b-5, previous research has shown that the manager will withhold his information if it is sufficiently unfavorable and will disclose it otherwise. When the manager's information is such that there exists an affirmative duty to disclose under Rule 10b-5, it is shown here that the manager will release either good news or news that is sufficiently bad. Further, the good news disclosures are expected to be more precise than those that reflect unfavorable information. It is also demonstrated that the probability of a disclosure will increase with both the precision of the manager's information and the variability of his firm's earnings.     

How do the content,format, and tone of Twitter-based corporate disclosure vary depending on earnings performance?

Using 86,891 tweets, from the official corporate Twitter accounts of 715 unique firms, this study examines whether and how managers strategically attract and distract investors’ attention from corporate news through Twitter. We find that firms with good earnings news use Twitter to post more earnings-related information directly, whereas firms with bad earnings news post more non-earnings-related information on Twitter. We further find that depending on earnings performance firms strategically choose the format of tweets (qualitative or quantitative) and the tone of earnings tweets (positive or negative) to attract investors’ attention to good news or distract investors’ attention from bad news. Our results are robust to difference-in-differences (DID), alternative sample periods, and different variable specifications. Our findings provide empirical evidence for investors and regulators regarding current practices in corporate information on Twitter.     

Unionization,product market competition,and strategic disclosure

We examine the disclosure policies of non-unionized firms operating in unionized industries. We test the hypothesis that non-unionized firms have an incentive to disclose more information when their unionized rivals are engaged in labor renegotiations; that is, to weaken them. We find that non-unionized firms disclose more information and more good news when renegotiations are ongoing. This behavior is stronger for larger firms, firms with fewer peers in the industry, and firms more similar to their renegotiating rivals. We also find some evidence that unionized firms are harmed by this behavior and that non-unionized firms benefit from their increased disclosures.     

An Experimental Market's Investigation of Discretionary Financial Disclosure

The extent to which market forces can induce full financial disclosure by managers has long been an issue of interest to regulators. Investigating this phenomenon with naturally occurring data produces a major obstacle: since managers' private information sets are unknown, it is necessary to make assumptions about them in order to interpret the nature (e.g., favourable or unfavourable, income increasing or income decreasing) of the information that is disclosed. The validity of the inferences relies critically on the validity of these assumptions. The present study uses a laboratory experiment to test three hypotheses derived from prior analytical and empirical research: (H1) When disclosure costs are zero, managers voluntarily disclose all (good and bad) news; (H2) When disclosure costs are positive. managers only disclose news which exceeds some threshold: and (H3) The mandatory disclosure of non-proprietary information induces an increase in the disclosure of correlated. proprietary information. One hundred and fifty-six subjects participated in markets with one firm manager and three investors. Over thirteen independent periods, the managers decided whether to truthfully disclose the liquidation value of the asset under their stewardship, and the investors submitted competing bids for the asset. With costless disclosure. investors price-protected themselves when managers withheld information, but the price penalty that they imposed was insufficient to induce full disclosure. With positive disclosure cost, investors reduced the price penalty that they imposed for non-disclosure, and managers disclosed proportionally fewer of the less extreme good news. Finally, mandatory disclosure of information had no significant impact on the voluntary disclosure of correlated proprietary information. Discussion centres on our failure to support the (equilibrium) prediction from analytical research that full disclosure should obtain when disclosures are costless. Several limitations of the study are examined. and it remains an open question whether additional trials (periods) in the present study might have provided full disclosure.     

Audit opinion improvement and the timing of disclosure

Companies have been found to report positive information more quickly than they report negative information (i.e., good news early, bad news late). This paper investigates the potential impact of audit opinion change on the timeliness of financial disclosures, with improvements in audit opinion considered to be “good news.” We take both the direction and the magnitude of audit opinion change into consideration, with magnitude measuring how far the opinion is from an unqualified opinion (i.e., an unqualified opinion with explanatory paragraph is closer to an unqualified opinion than a qualified opinion is). We find that firms experiencing an improvement in their audit opinions disclose their financial results earlier, while those with audit opinion deteriorations report their financial results later, and that these effects were related to the magnitude of the opinion change. What's more, there is an asymmetric response to good audit opinion news vs. bad audit opinion news, with bad audit opinion news having a larger effect on earnings timeliness than the effect on earnings timeliness of good audit opinion news. Overall, our results support the “good news early, bad news late” notion. Finally, we also find that overall earnings timeliness has improved in China since the enactment of new reporting regulations in 2006.     

Asymmetric information consolidation and price discovery: Inferring bad news from insider sales

Due to the paucity of sources of negative firm‐specific information, US capital markets have more difficulty identifying and incorporating bad news into stock prices than they do good news. Even though insider selling is a potentially important proxy for undisclosed bad news, researchers have difficulty ex ante identifying information‐based sales due to an inability to separate liquidity‐motivated from information‐based insider trades. We hypothesize that when insiders in multiple firms sell shares of one firm in which they are insiders and at the same time buy shares of other insider portfolio firms, the sale is more likely to be information‐based, since the proceeds are reinvested. Conversely, when an insider sells one firm without purchasing others or sells multiple insider firms the sale is likely liquidity‐motivated. We find that insider sales identified as information‐based using this algorithm are followed by significant negative abnormal returns. Information‐based sales are also more likely to be associated with delistings, earnings declines and earnings restatements. Analysts are also more likely to revise their earnings forecasts downwards for these firms. It is thus possible to ex ante identify insider sales with information content. Our results will be of interest to investors and also to regulators designing insider trading rules.     

Inside the <Emphasis FontCategory="SansSerif">“</Emphasis>black box<Emphasis FontCategory="SansSerif">”</Emphasis> of private in-house meetings

We examine information content and related insider trading around private in-house meetings between corporate insiders and investors and analysts. We use a hand-collected dataset of approximately 17,000 private meeting summary reports of Shenzhen Stock Exchange firms over 2012–2014. We find that these private meetings are informative and corporate insiders conducted over one-half of their stock sales (totaling $8.7 billion) around these meetings. Some insiders time their transactions and earn substantial gains by selling (purchasing) relatively more shares before bad (good) news disclosures while postponing selling (purchasing) when good (bad) news is to be disclosed in the meeting. Finally, we conduct a content analysis of published meeting summary reports and find that the tone in these reports is associated with stock market reactions around (1) private meetings themselves, (2) subsequent public release of private meeting details, (3) subsequent earnings announcements and (4) future stock performance.     

Insiders’ incentives for asymmetric disclosure and firm-specific information flows

Recent research suggests that insiders’ incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news (Jin and Myers, 2006). We investigate whether insiders’ incentives for private control benefit, proxied by control-ownership wedge, affect firm-specific return characteristics. We find that control-ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news. Overall, our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow.     

Insider Trading in Financial Signaling Models

We study the impact of voluntary trade by the manager. We find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and thus the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings.     

Announcing the announcement

What drives investors’ attention? We study how far in advance earnings calendars are pre-announced and find that investors are more attentive to earnings news when such details are disclosed well ahead of time. This variation in investors' attention affects short-run and long-run stock returns, thereby creating incentives for firms to strategically pre-announce the report date on short notice when the earnings news is bad. Consistent with this idea, firms pre-announce their report dates well ahead of time when earnings are good and do it at the very last moment when earnings are bad. A trading strategy that exploits such variations yields abnormal returns of 1.5% per month.     

Voluntary Disclosure of Nonproprietary Information: A Complete Equilibrium Characterization

The so-called disclosure principle is a 'puzzle' in the accounting literature: Game theoretic models of financial markets show that in equilibrium firms should disclose all their private information. Yet, the result is not convincing. Researchers have therefore built sophisticated models in order to demonstrate for which reasons the disclosure principle might fail. This note shows that even in the original model there are multiple equilibria. In those equilibria good types disclose and bad types do not. The commonly known full disclosure equilibrium is a limit point of the equilibrium set.     

The Many Faces of Information Disclosure

In this article we ask: what kind of information and how muchof it should firms voluntarily disclose? Three types of disclosuresare considered. One is information that complements the informationavailable only to informed investors (to-be-processed complementaryinformation). The second is information that is orthogonal tothat which any investor can acquire and thus complements theinformation available to all investors (preprocessed complementaryinformation). And the third is information that substitutesfor the information of the informed investors in that it revealsto all what was previously known only by the informed (substituteinformation). Our main results are as follows. First, in equilibrium,all types of firms voluntarily disclose all three types of information.Second, in contrast to the existing literature, complementaryinformation disclosure by firms strengthens investors' privateincentives to acquire information. Substitute information disclosureweakens private information acquisition incentives. Third, whilecomplementary information disclosure has an ambiguous effecton financial innovation incentives, substitute information disclosureweakens those incentives.     

Voluntary disclosures and information production by analysts

We analyze the voluntary disclosure decision of a manager when analysts scrutinize the quality of disclosure. We derive an equilibrium in which managers voluntarily disclose unfavorable information only if sufficiently precise, but disclose favorable news with lower levels of accuracy. We show that analysts cover good news disclosures with higher scrutiny. To the extent analysts rely on mandatory financial reports to interpret voluntary disclosures, we show that more precise financial reports may lead to more precise but less frequent voluntary disclosures. Moreover, a slant toward conservatism in financial reports can lead to less precise yet more frequent voluntary disclosures.     

The effect of stock price on discretionary disclosure

I examine the impact of exogenous changes in stock prices on voluntary disclosure. Specifically, I investigate whether stock price declines prompt managers to voluntarily disclose firm-value-related information (management forecasts) that was withheld prior to the decline because it was unfavorable but became favorable at a lower stock price. Consistent with my predictions, I find that managers are more likely to release good-news forecasts following larger stock price declines but that there is no association between the likelihood of releasing good-news forecasts and the magnitude of stock price increases. Additional evidence indicates that the good-news forecasts eventually conveyed by withholding firms after negative price shocks would likely have resulted in negative market reactions had they been released before the shocks. More generally, I provide evidence that managers withhold bad news and that exogenous stock price declines can induce its disclosure.     

Incentives for voluntary disclosure

Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firms for misrepresentation or omission. Since firms are principal-agent contracts between owners – contract designers – and privately informed managers, owners are the ultimate firms’ voluntary disclosure strategists. We analyze voluntary disclosure equilibrium in a game with two types of owners: expected liquidating dividends motivated (VMO) and expected price motivated (PMO). We find that Rule l0b-5: (i) does not deter misrepresentation and may suppress voluntary disclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news.