Voluntary Disclosure of Bad News

Abstract:   This paper shows that in a voluntary disclosure environment entailing both a fixed disclosure cost and a variable proprietary cost, partial disclosure equilibria may arise in which firms voluntarily disclose bad private information to the public. Furthermore, it is shown that such equilibria may arise more frequently as the threat of incuring proprietary cost increases and/or the proprietary cost itself increases.     

Voluntary Disclosure,Manipulation, and Real Effects

We study a model in which managers’ disclosure and investment decisions are both endogenous and managers can manipulate their voluntary reports through (suboptimal) investment, financing, or operating decisions. Managers are privately informed about the value of their firm and have incentives to voluntarily disclose information and manipulate their reports in order to obtain more favorable terms when issuing equity to finance a new profitable investment opportunity. The model shows that treating managers’ disclosure and investment decisions both as endogenous and allowing managers to manipulate their voluntary reports yields qualitatively different predictions from when the disclosure and investment decisions are considered separately and managers cannot engage in manipulation. The model predicts that managers’ disclosure strategy is sometimes characterized by two distinct nondisclosure intervals (contrary to traditional threshold equilibria of voluntary disclosure models) and that managers with intermediate news sometimes forego the new profitable investment opportunity. As such, the paper highlights the importance of considering the interdependencies between firms’ disclosure and investment decisions and provides new empirical predictions.     

Shareholder litigation,management forecasts,and productive decisions during the initial public offerings

This paper develops a model to analyze the impact of shareholder litigation on managers’ voluntary disclosure strategies in equity offerings. The major findings are as follows. First, under different economic parameters, the entrepreneur has two possible equilibrium disclosure strategies: full and partial disclosure. Of particular interest is the latter equilibrium, in which shareholder litigation can give the entrepreneur incentives to partially disclose her private information. Second, production decisions might be distorted by the entrepreneur’s disclosure incentives. The full disclosure equilibrium is associated with underinvestment, while overinvestment exists in the partial disclosure equilibrium.     

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.     

Earnings Performance and Discretionary Disclosure

While the influence of earnings performance on disclosure is a fundamental issue in the disclosure literature, our understanding of this influence is limited. In this paper, I examine a comprehensive set of disclosures from a sample of firms experiencing an extended period of seasonally adjusted earnings increases. I study how these firms adjust disclosure in response to earnings increases, how disclosure changes as the period of strong earnings performance nears an end and how firms disclose during a subsequent period of earnings decline. I find an increase in disclosure during the period of increased earnings. This increase is pervasive across all types of disclosure and tends to be bundled with earnings announcements. The market responds positively to this disclosure. Firms continue to disclose at a high level as they approach earnings declines. However, they shift to disclosures that focus on the positive short-term results and do not discuss the impending decreases. While this behavior is systematic, the market does not appear to anticipate the subsequent earnings declines. Once the firms announce earnings declines, the magnitude of disclosure returns to the level provided prior to the increased earnings.     

Learnability and monetary policy: A global perspective

The recent literature on monetary policy design has emphasized the importance of equilibrium determinacy and learnability in the choice of policy rules. This paper contains an analysis of the learnability of the equilibrium in a class of simple, micro-founded models in which the policy authority uses a Taylor-type monetary policy rule. Unlike previous analyses, the model economy is not linearized about a steady state—instead, a global perspective is adopted. Globally, the nonlinear model economy can possess rational expectations equilibria other than the steady state consistent with the inflation target of the monetary authorities. These include a second, low inflation ‘liquidity trap’ steady state, periodic equilibria, and sunspot equilibria. The main results in the paper characterize the conditions under which these alternative equilibria maybe stable under adaptive learning, even when the policy rule obeys the Taylor principle. The stability of multiple equilibria is associated with policy rules which are forecast-based. An important finding is that backward-looking Taylor-type policy rules can guarantee that the unique learnable equilibrium is the steady state associated with the inflation target of the monetary authority.     

Competitive Effects of Disclosure in a Strategic Entry Model

We investigate the welfare consequences of incumbent firms' mutual disclosure of cost information when there is a threat of entry from a firm not required to disclose its private cost information. New effects of disclosure are observed relative to no-entry models, with the result that incumbents' expected output is a decreasing function of the disclosure level. However, further analysis shows that increased disclosure usually increases incumbent expected profits and decreases expected consumer surplus, despite the additional entry effect of disclosure. Such analytical derivations provide objective input to the FASB as they attempt to predict the competitive effects of changing mandated disclosure requirements.     

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.     

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.     

Voluntary CSR disclosure,institutional environment,and independent audit demand

Using a sample of A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, this study examines the impact of voluntary corporate social responsibility (CSR) disclosure on independent audit demand in different institutional environments. The sample covers the 2008–2016 period and excludes firms that are required to disclose CSR information. The findings show that compared with companies that choose to not disclose such information, companies that voluntarily disclose CSR information prefer to employ “small” accounting firms for auditing services, although the auditing fees are much higher. However, as the institutional environment improves, this preference is weakened. Further analyses show that this preference is stronger in enterprises where CSR disclosure is driven by strong political motivations and managerial self-interest motivations. Legitimate motivations and economic motivations do not significantly impact the preference for “small” audit firms. Furthermore, this preference is more obvious in enterprises with poor operational performance and low information disclosure quality, and it increases as CSR disclosure level decreases. The study enriches our understanding of the economic consequences of voluntary CSR disclosure and the factors that influence independent audit demand. The results also have implications for the construction and regulation of China’s system for supervising CSR information disclosure in the transitional phase.     

Nondisclosure and adverse disclosure as signals of firm value

We present a model in which some of the firm's information ('news')can be disclosed verifiably and some information ('type') cannot,to show that some firms may voluntarily withhold good news anddisclose bad news. We describe an equilibrium in which high-typefirms withhold good news and disclose bad news, whereas low-typefirms disclose good news and withhold bad news. Under some parametervalues, this equilibrium exists when other more traditionalequilibria are ruled out by standard equilibrium refinements.The model explains some otherwise anomalous empirical evidenceconcerning stock price reactions to disclosure, provides somenew empirical predictions, and suggests that mandatory disclosurerequirements may have the undesirable consequence of makingit more difficult for firms to reveal information that cannotbe disclosed credibly.     

Voluntary disclosure of information when firms are uncertain of investor response

A firm may prefer not to disclose its private information if it is uncertain of investor response. In the setting under consideration, a firm needs to acquire capital from an investor. The investor can choose to invest in the firm, the risk free asset or in some alternative risky investment opportunity. It is shown that in a partial disclosure equilibrium, the firm discloses average information and withholds bad and good information. Disclosure of average information arises to attract the investor's capital away from the risk free asset.     

Disclosing to Informed Traders

We develop a model in which a firm's manager can voluntarily disclose to privately informed investors. In equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, public information can crowd in more voluntary disclosure.     

Optimal Disclosure Policy in Oligopoly Markets

This paper examines the private and social optimality of full disclosure of private information in a two-period oligopoly model. An incumbent firm is privately informed about the market demand and its production cost after operating as a monopolist in the first period, and then competes against an entrant in the second period. Two main results are derived. First, it is shown that the incumbent is best off by pre-committing to disclose both the demand and cost information. By disclosing full information, the incumbent nullifies its self-defeating intertemporal incentives, which arise whenever it has private information about the market demand, its cost efficiency, or both. In addition, the equilibrium output variance is the largest under full disclosure, which benefits the incumbent ex ante. Second, the paper shows that the incumbent's full disclosure of the demand and cost information may or may not be desirable from a social efficiency standpoint. In particular, the correlation between the firms' production costs is crucial to the rank of disclosure policies in terms of their impact on social efficiency.     

The Relationship between Voluntary Disclosure,External Financing and Financial Status

Using unique Swedish disclosure data from 2007 to 2012, this paper reports three important sets of findings with regard to the relationship between firms’ voluntary disclosure, external financing and financial status. First, financially strong firms disclose more than weaker ones. Second, firms that obtain new financing (equity or debt) disclose more than firms that do not. Third, the association between voluntary disclosure and financing events is stronger in financially weak firms. This last finding is new in the literature. Perhaps financially weak firms that obtain external funding have higher disclosure to counteract contracting and valuation problems in the financial markets.     

When does a firm disclose product information?

A firm chooses a price and the product information it discloses to a consumer whose tastes are privately known. We provide a necessary and sufficient condition on the match function for full disclosure to be the unique equilibrium outcome whatever the costs and prior beliefs about product and consumer types. It allows for products with different qualities as well as some horizontal match heterogeneity. With independently distributed product and consumer types, full disclosure is always an equilibrium and a necessary and sufficient equilibrium condition is that all firm types earn at least the full‐disclosure profit.     

Disclosure “Bunching”

This paper studies managers' preferences among information acquisition and disclosure policies when their firms are required to engage in “real‐time” or “continuous” financial reporting. The paper predicts that for many, but not all, processes describing the distribution of their firms' cash flows, when subject to such reporting requirements, managers will engage in disclosure “bunching,” that is, they will bunch the discretionary component of the information they acquire and disclose into a single point in time rather than spread the acquisition and disclosure of that information over time. We show that managers' preferred bunching period depends on managers' strategy for trading in their firms' shares, managers' risk aversion, the risk premium the capital market attaches to firms' shares, and the size of managers' initial ownership stakes in their firms. We also study and characterize how the equilibrium prices of firms' shares vary over time and also how managers' optimal trading strategies vary with their most preferred “bunching” strategies. Several extensions confirm the robustness of the optimality of disclosure “bunching.”     

Silence can be golden: On the value of allowing managers to keep silent when information is soft

Most information that public firms are required to disclose is relatively hard (e.g., historical information), whereas the disclosure of relevant information that is softer in nature (e.g., forward-looking information) is typically left to firms' discretion. The lack of a mandatory requirement to disclose soft information has been at the heart of a number of on-going accounting debates. This study shows that while mandating disclosure increases the frequency of disclosure, it results in a reduction in disclosure quality when information is soft. By exploring this tradeoff, the paper sheds light on the merits of restricting mandatory disclosure requirements to verifiable information and leaving disclosure of soft information unregulated. The value of leaving disclosure unregulated is shown to be maximized when managers are given bonus-based compensation, with minimum performance thresholds and maximum caps, similar to those documented in the literature.     

Can learnability save new-Keynesian models?

McCallum (2009) argues that “learnability” can save new-Keynesian models from indeterminacies. He claims the unique bounded equilibrium is learnable, and the explosive equilibria are not. However, he assumes that agents can directly observe the monetary policy shock. Reversing this assumption, I find the opposite: the bounded equilibrium is not learnable and the unbounded equilibria are learnable. More generally, I argue that a threat by the Fed to move to an “unlearnable” equilibrium for all but one value of inflation is a poor foundation for choosing the bounded equilibrium of a new-Keynesian model.     

上市公司内部控制缺陷披露现状研究——基于2009-2010年深市主板A股的实证分析

本文以2009~2010年深市主板A股上市公司披露的内部控制自我评估报告为依据,分析了内部控制缺陷披露的整体状况、具体类型及存在的问题。研究发现,2010年披露缺陷的公司数量显著低于2009年,内部控制整体水平逐年提高,存在缺陷较多的要素是内部环境、控制活动、信息与沟通。在披露过程中,上市公司主动披露内部控制缺陷的意识不强,缺乏内部控制缺陷的认定和披露标准,且部分公司对内部控制缺陷界定不清楚。