Voluntary disclosure when private information and disclosure costs are jointly determined

Review of Accounting Studies - Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private...     

Country-specific risks and geographic disclosure aggregation: Voluntary disclosure behaviour by British multinationals

Country-by-country reporting can promote accountability and corporate transparency by highlighting the activities of multinational firms in different countries. We examine the voluntary disclosure behaviour of leading British multinational firms in respect of country-specific risks. Specifically, we consider whether British multinationals' engagement in geographic disclosure aggregation/disaggregation of their country-by-country operations is associated with the country-specific business, economic, and political risks faced by their principal operating subsidiaries. We study the information disclosed in two key sections of corporate annual reports: segment information, and principal uncertainties and risks. Our findings show that British multinationals are less likely to voluntarily report their segment and risk information on a disaggregated geographic country-by-country basis if they are engaged in operations in countries associated with higher levels of country-specific risks. Country-specific risk disclosures are an important case, consistent with voluntary disclosure theory, where costs tend to outweigh benefits from the perspective of what is perceived to be in a multinational firm's best interests.     

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.     

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.     

Voluntary disclosure and corporate innovation

Review of Quantitative Finance and Accounting - We examine whether a firm’s voluntary disclosures, proxied by management earnings forecasts, affect its innovation activity. A firm making more...     

Good disclosure,bad disclosure

We study real-efficiency implications of disclosing public information in a model with multiple dimensions of uncertainty where market prices convey information to a real decision maker. Paradoxically, when disclosure concerns a variable that the real decision maker cares to learn about, disclosure negatively affects price informativeness, and in markets that are effective in aggregating private information, this negative price-informativeness effect can dominate so that better disclosure negatively impacts real efficiency. When disclosure concerns a variable that the real decision maker already knows much about, disclosure always improves price informativeness and real efficiency. Our analysis has important empirical and policy implications for different contexts such as disclosure of stress test information and regulation of credit ratings.     

Real-time revenue and firm disclosure

Review of Accounting Studies - We examine firm disclosure choice when information is received on a real-time, continuous basis. We use transaction-level credit and debit card sales for a sample of...     

Information overload and disclosure smoothing

Review of Accounting Studies - This paper examines whether managers can reduce the detrimental effects of information overload by spreading out, or temporally smoothing, disclosures. We begin by...     

Value relevance of value-at-risk disclosure

The SEC issued FRR No. 48 in 1997 to enhance public disclosure of firms’ exposures to market risk. We examine whether the quantitative value-at-risk (VAR) estimates disclosed by 81 non-financial firms during the period 1997–2002 are value-relevant using the earnings-returns relation. The empirical results indicate that high VAR is associated with weaker earnings-returns relation. Further analysis shows that VAR is positively and significantly associated with future stock return volatility. Our evidence suggests that investors perceive the earnings of firms with substantial market risk exposure to be less persistent, and adjust the future abnormal earnings for the higher risk exposure. Thus, this results in a lower expected rate of return.

Voluntary disclosure,mandatory disclosure and the cost of capital

We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosure: those that are a function of periodic reports that are realizations of ex‐ante reporting systems and those that arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information the firm provides via 8K filings. To capture periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relationship between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relationship depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosure examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.     

Hedge fund ownership and voluntary disclosure

Review of Quantitative Finance and Accounting - Using 13F filings from 1996 to 2011, we document that hedge fund holdings are negatively associated with the subsequent frequency of portfolio...     

Measuring disclosure using 8-K filings

Review of Accounting Studies - We construct four voluntary and two mandatory disclosure measures for 260,880 firm-quarters from 2005 through 2016 using 8-K data. The first voluntary...     

Corporate innovation strategy and disclosure policy

Review of Quantitative Finance and Accounting - We examine the impact of a firm’s innovation strategy on its disclosure policy. Using a sample of innovation-intensive U.S. firms from 1992 to...     

A simple structural estimator of disclosure costs

Review of Accounting Studies - This study recovers a simple firm-level measure of disclosure costs implied by the voluntary disclosure theory of Verrecchia (Journal of Accounting and Economics...     

Firms' rationales for CEO duality: Evidence from a mandatory disclosure regulation

Exploiting the 2009 amendments to Regulation SK, we provide unique evidence on the first-time disclosure of the reasons firms state for combining or separating the roles of CEO and chairman. The stated reasons support both agency theory and organization theory. They are more numerous, comprise more words, and have a more positive tone for firms with duality. Examining the announcement returns to firms' disclosures, we find that investors evaluate the most frequently cited reasons for CEO duality by considering firm's characteristics. Our evidence enhances the understanding of firms' endogenous decision to opt for CEO duality and its value consequences.     

The real effects of disclosure regulation: Evidence from mandatory CFO compensation disclosure

The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.     

Voluntary disclosure of operating income

This study investigates whether New Zealand firms’ voluntary disclosure of operating income, which is also known as earnings before interest and tax, in the income statement is related to the investment opportunity set. New Zealand provides an ideal setting to examine this because New Zealand generally accepted accounting principles do not require the disclosure of operating income as an intermediate income number in arriving at net income (earnings) in the income statement. We hypothesize and find evidence that firms with high assets‐in‐place and high leverage are more likely to voluntarily disclose operating income/earnings before interest and tax. However, the assets‐in‐place finding is sensitive to alternative measures of the investment opportunity set.     

Career concerns and mandated disclosure

This paper examines the effects of mandated disclosure on the design of contracts and induced behavior in the presence of career concerns. We analyze the impact of two key properties of a mandated performance measure that is publicly disclosed: its sensitivity to the agent’s effort and its informativeness about the agent’s ability. We show conditions under which the agent’s effort (and the firm’s output) and the pay-for-performance weight critically depend on these two properties. In particular, when the mandated measure is sufficiently noisy, the pay-for-performance weight always decreases relative to a setting with no mandated measure. But when the mandated measure’s noise is close to that of the existing performance measure, the effect of a mandated measure on the pay-for-performance weight depends on the effort-sensitivity and informativeness of the measure. We also characterize settings where a mandated disclosure would be desirable or not; variations arise because mandated disclosures can increase both effort and risk. Our results imply that mandating the public disclosure of performance measures, particularly measures that are relatively informative about ability but are difficult to influence through managerial effort, may have the unintended consequence of generating inefficiencies in firms’ employment contracts.     

Management disclosure bias and audit services

This paper considers the level of bias observed in management disclosures of earnings forecasts and historic earnings data in Australian prospectuses. Management forecasts and naïve forecasts derived from managements’ normalised historic data are analysed. A key focus is upon the possible association between such forecast bias and differential audit services performed upon the data. Audit firm size and level of engagement are modelled against bias. The full sample revealed no overestimation bias for any of the forecast models, but underestimation was observed for elements of the management and random walk naïve forecasts. Cross-sectionally, a significant association was observed between forecast bias and audit firm size across all three forecast models. Specifically, the audit firm size variable (Non Big-5/Big-5) was inversely associated with the extent to which forecasted and normalised historic earnings data were upwardly biased. On the other hand, the level of engagement was not a significant discriminator for forecast bias. These outcomes are contrasted against others reported elsewhere in the literature and suggest a risk in generalising across contexts. The findings imply a level of ‘disclosure management’ regarding company IPO forecasts and normalised historic accounting data, with forecast overestimation and error size more extreme when the monitoring expertise and/or reputation of auditors is lower (JEL D80, G14, M41, N27).     

Biased voluntary disclosure

We provide a bridge between the voluntary disclosure and the earnings management literature. Voluntary disclosure models focus on managers’ discretion in deciding whether or not to provide truthful voluntary disclosure to the capital market. Earnings management models, on the other hand, concentrate on managers’ discretion in deciding how to bias their mandatory disclosure. By analyzing managers’ disclosure strategy when disclosure is voluntary and not necessarily truthful, we show the robustness of voluntary disclosure theory to the relaxation of the standard assumption of truthful reporting. We also demonstrate the sensitivity of earnings management theory to the commonly made mandatory disclosure assumption.