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.     

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.     

Short selling constraints and politically motivated negative information suppression

This study examines the effect of short selling constraints on politically motivated suppression of negative information. We use a unique setting in China, in which there are multiple exogenous changes in short selling constraints and firms have strong incentives to suppress negative information during politically sensitive periods. Results from Difference-in-Differences analyses and a regression discontinuity design show that removing short selling constraints can reduce politically motivated bad news suppression. Short selling can reduce negative information suppression through the channels of improved financial reporting quality, more voluntary disclosure from management, and more timely release of information by media. In addition, the effect of short selling on reducing bad news hoarding is more pronounced for more politically sensitive meetings and for state-owned firms located in regions with weaker market and institutional development.     

Less timely earnings announcements and voluntary disclosure

The release of earnings information has become less timely in recent years partly because firms increasingly disclose earnings concurrently with their periodic reports (e.g., 10-Ks, 10-Qs). We examine whether firms use voluntary disclosure to mitigate the negative economic consequences of less timely earnings announcements (EAs). We find that firms with less timely EAs are more likely to provide voluntary 8-K filings over the period leading to the EA. We also find that investors’ demand for timely information, the nature of earnings news and litigation risk affect the extent to which firms provide voluntary disclosure to compensate for less timely EAs. The negative effect of less timely EAs on information asymmetry is attenuated when firms provide voluntary 8-K filings prior to EAs. Overall, our findings suggest that firms voluntarily communicate with investors using voluntary disclosure when their EAs are less timely.     

Asymmetric effects of voluntary disclosure on stock liquidity: evidence from 8‐K filings

This paper examines whether the change in stock liquidity subsequent to voluntary disclosure is different between good news and bad news. Using voluntary 8‐K filings, we find that the increase in stock liquidity is more pronounced for firms with good news disclosure than for firms with bad news disclosure. In addition, such findings are stronger when a firm is less visible and when the short‐selling costs are high, suggesting that these two factors play an important role in increasing stock liquidity. Overall, this paper provides evidence that the tone of voluntary 8‐K news is an important determinant of stock liquidity.     

The Credibility of Voluntary Disclosure and Insider Stock Transactions

We examine stock price reaction to voluntary disclosure of innovation strategy by high‐tech firms and its relation with insider stock transactions before the disclosure. We find that, despite the qualitative and subjective nature of strategy‐related disclosure, there is positive stock price reaction to the disclosure. The evidence suggests that investors view the disclosure as credible good news. We also find that the disclosure is associated with more positive stock price reaction when it is preceded by insider purchase transactions. This evidence is consistent with insider purchase enhancing the credibility of the disclosure. The credibility‐enhancing effect is found to be stronger for firms with higher degrees of information asymmetry (younger firms, firms with lower analyst following, loss firms, and firms with higher research and development (R&D) intensity). Our evidence also indicates that predisclosure insider purchase is associated with greater future abnormal returns, suggesting that managers are privy to good news shortly before the disclosure.     

Do Family Firms Provide More or Less Voluntary Disclosure?

We examine the voluntary disclosure practices of family firms. We find that, compared to nonfamily firms, family firms provide fewer earnings forecasts and conference calls, but more earnings warnings. Whereas the former is consistent with family owners having a longer investment horizon, better monitoring of management, and lower information asymmetry between owners and managers, the higher likelihood of earnings warnings is consistent with family owners having greater litigation and reputation cost concerns. We also document that family ownership dominates nonfamily insider ownership and concentrated institutional ownership in explaining the likelihood of voluntary disclosure. Using alternative proxies for the founding family's presence in the firm leads to similar results.     

Disclosure incentives when competing firms have common ownership

This paper examines whether common ownership – i.e., instances where investors simultaneously own significant stakes in competing firms – affects voluntary disclosure. We argue that common ownership (i) reduces proprietary cost concerns of disclosure, and (ii) incentivizes firms to “internalize” the externality benefits of their disclosure for co-owned peer firms. Accordingly, we find a positive relation between common ownership and disclosure. Evidence from cross-sectional tests and a quasi-natural experiment based on financial institution mergers help mitigate concerns that our results are explained by an omitted variable bias or reverse causality. Finally, we find that common ownership is associated with increased market liquidity.     

Corporate voluntary disclosure and the separation of cash flow rights from control rights

We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.

Credit Ratings and Managerial Voluntary Disclosures

This study investigates whether managers influence credit ratings via voluntary disclosures. I find that firms near a rating change have a higher incidence of a disclosure regarding product and business expansion (PBE) plans. This finding is more evident for firms that are subject to lower proprietary costs of disclosures, which implies that managers do trade off both the benefits and costs of the disclosures. I find no evidence that firms close to a rating change selectively release good news or suppress bad news on PBE. Overall, my results suggest that firms generally exhibit a credible commitment to maintaining disclosure transparency for a desired credit rating.     

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.     

Are managers strategic in reporting non-earnings news? Evidence on timing and news bundling

Using a comprehensive sample of non-earnings 8-K filings from 2005 to 2013, we examine whether firms strategically report mandatory and voluntary news. In particular, we examine whether firms report negative news when investor attention is low and whether they bundle positive and negative news. Our findings support the notion that managers believe in the existence of investor inattention and strategically report negative news after trading hours. These results particularly apply to public firms, where equity market pressures provide stronger incentives to mitigate market reaction to news by exploiting investor inattention. Further analysis of the market reaction to strategic disclosure uncovers no evidence of investor inattention, consistent with market efficiency. We also observe that public firms are more likely to strategically disclose through news bundling and that the likelihood of this increases with the likelihood of strategic disclosure through timing.     

An empirical examination of forecast disclosure by bidding companies

This paper examines voluntary disclosure of profit forecasts by bidding companies during takeovers. Disclosure is examined from two perspectives: (i) factors influencing disclosure and (ii) the influence of good news and bad news on disclosure. Takeover documents published during 701 takeover bids for public companies listed on the London Stock Exchange in the period 1988 to 1992 were examined. Two variables accounted for almost all the influences on disclosure of forecasts: bid horizon and type of bid. Probability of forecast disclosure was greater the shorter the bid horizon and during contested bids. In addition, there was some evidence that the nature of the purchase consideration offered by the bidder (cash or paper) and the industry of the bidder influenced disclosure. Disclosure was significantly more likely in paper bids and in the durable goods industry. Forecasts were more likely to be disclosed when firms had good news to report.     

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.     

Value relevance of voluntary disclosure in the annual report

This paper examines whether the level of voluntary disclosure affects the association between current returns and future earnings. Economic theory suggests that firms might find it advantageous to provide additional pieces of information (i.e. voluntary disclosure) to investors and analysts. Our results indicate that more voluntary disclosure does not improve the association between current returns and future earnings (i.e. current returns do not reflect more future earnings news). This finding raises the question of whether voluntary information in the annual report contains value‐relevant information about future earnings or if investors are simply not capable of incorporating voluntary information in the firm value estimates.     

Escape from New York: The market impact of loosening disclosure requirements

We examine the first significant deregulation of U.S. disclosure requirements since the passage of the 1933/1934 Exchange and Securities Acts: the 2007 Securities and Exchange Commission (SEC) Rule 12h-6. Rule 12h-6 has made it easier for foreign firms to deregister with the SEC and thereby terminate their U.S. disclosure obligations. We show that the market reacted negatively to the announcement by the SEC that firms from countries with weak disclosure and governance regimes could more easily opt out of the stringent U.S. reporting and legal environment. We also find that since the rule's passage, an unprecedented number of firms have deregistered, and these firms often had been previous targets of U.S. class action securities lawsuits or SEC enforcement actions. Our findings suggest that shareholders of non-U.S firms place significant value on U.S. securities regulations, especially when the home country investor protections are weak.     

What Do Management Earnings Forecasts Convey About the Macroeconomy?

We decompose quantitative management earnings forecasts into macroeconomic and firm‐specific components to determine the extent to which voluntary disclosure provided by management has macroeconomic information content. We provide evidence that the forecasts of bellwether firms, which are defined as firms in which macroeconomic news explains the greatest amount of variation in the forecasts, provide timely information to the market about the macroeconomy when bundled with earnings announcements. Further, we show that bellwether firms provide timely information about both industry‐specific events and broader economic events. Finally, we document that the macroeconomic news in individual forecasts is more pronounced for bad news and point forecasts.     

Does voluntary balance sheet disclosure mitigate post-earnings-announcement drift?

Theory suggests that balance sheet information such as total assets, total equity, or total liabilities complements earnings information in helping investors assess a firm’s profitability and estimate earnings growth. The voluntary disclosure of balance sheet information at earnings announcement could help investors gather and process this information at a lower cost. We therefore predict that voluntary balance sheet disclosure at the time of an earnings announcement helps investors promptly understand the implication of current earnings news for future earnings and subsequently reduces post-earnings-announcement drift (PEAD). Consistent with these predictions, our results show that when firms provide voluntary balance sheet disclosures, the earnings response coefficient in the event window is significantly higher and the corresponding PEAD is significantly lower. We further find that the impact of voluntary balance sheet disclosure on PEAD is more pronounced when the magnitude of balance sheet value surprise is larger, when balance sheet value is more informative about future earnings, when earnings uncertainty is higher, or when information cost is higher, consistent with our conjectures that helping investors to better understand future earnings performance and lowering information costs are key mechanisms underlying the effect of voluntary balance sheet disclosure on PEAD.     

Why Muddy the Water? Short selling and the disclosure of proprietary information

The conventional wisdom of voluntary disclosure literature is that the major factor preventing firms from disclosing customer-related information is firms' concern for proprietary costs. However, non-disclosure may also happen when firms have bad news to hide and are concerned about short sellers using customer information to verify bad news about the firms. By implementing a difference-in-differences research design against the backdrop of the deregulation of short selling in China, we find that increased short-selling pressure discourages firms from disclosing the identities of major customers. The findings also reveal consistent evidence supporting the bad news hoarding hypothesis rather than the proprietary cost hypothesis. Overall, our study provides an alternative explanation for firms’ lack of disclosure of customer information.     

Intertemporal Dynamics of Corporate Voluntary Disclosures

While empirical evidence alludes to the intertemporal nature of corporate voluntary disclosures, most of the existing theory analyzes firms' voluntary disclosure decisions within single‐period settings. Introducing a repeated, multiperiod, disclosure setting, we study the extent to which firms' strategic disclosure behavior in the past affects their prosperity to provide voluntary disclosures in the future. Our analysis demonstrates that by voluntarily disclosing private information firms make an implicit commitment to provide similar disclosures in the future, and therefore are less willing to voluntarily disclose information in the first place. This effect is expected to be of larger magnitude for firms (1) with a long history of absence of voluntary disclosures and an impressive past operating performance, or (2) that operate in a relatively stable and predictable business and information environment, or (3) whose managers have a long time horizon and a high degree of risk aversion.