Discretionary Aggregation

2016 ◽  
Vol 92 (1) ◽  
pp. 73-91 ◽  
Author(s):  
Michael Ebert ◽  
Dirk Simons ◽  
Jack D. Stecher
Keyword(s):  
Private Information ◽  
Voluntary Disclosure ◽  
Bad News ◽  
Good News ◽  
News Source ◽  
Hide Information ◽  
Many Sources ◽  
Jel Classifications

ABSTRACT We study a disclosure decision for a firm's manager with many sources of private information. The presence of multiple numerical signals provides the manager with an opportunity to hide information via aggregation, presenting net amounts in order to show information in its best light. We show that this ability to aggregate fundamentally changes the nature of voluntary disclosure, due to the market's inability to verify that a report is free of strategic aggregation. We find that, in equilibrium, the manager fully discloses if and only if the manager's private information makes the firm look sufficiently weak. By separating bad news from good news, a disaggregate report informs the market of as much offsetting news as possible, revealing how close the news is to a neutral benchmark. The result is, therefore, pooling at the top and separation at the bottom, the opposite of what transpires with a single news source. JEL Classifications: M41; D82; D83.

scholarly journals Shareholder Litigation and the Information Content of Management Voluntary Disclosure

2019 ◽  
Vol 95 (5) ◽  
pp. 279-298
Author(s):  
Yuanyuan Ma
Keyword(s):  
Information Content ◽  
Private Information ◽  
Voluntary Disclosure ◽  
Legal Liability ◽  
Bad News ◽  
Good News ◽  
Voluntary Disclosures ◽  
Shareholder Litigation

ABSTRACT I study the information content of management voluntary disclosures disciplined by shareholder litigation. I model the litigation mechanism in which legal liabilities are based on the damages that shareholders suffer from buying a stock at an inflated price. I find that management does not fully reveal private information in equilibrium. Instead, their disclosures reveal only a range in which their private information lies. Thus, the precision of information is, to some extent, lost. Notably, increasing the severity of legal liability does not always reduce the loss of precision. In fact, when the legal liability reaches a certain level, more severe legal liability will result in less precise disclosures. I also find that good news and bad news have different precision. Specifically, good news is more precise than is bad news when legal liabilities are high, and bad news is more precise than is good news when legal liabilities are low.

Do Managers Disclose or Withhold Bad News? Evidence from Short Interest

2018 ◽  
Vol 94 (3) ◽  
pp. 1-26 ◽  
Author(s):  
Dichu Bao ◽  
Yongtae Kim ◽  
G. Mujtaba Mian ◽  
Lixin (Nancy) Su
Keyword(s):  
Private Information ◽  
Voluntary Disclosure ◽  
Stock Price ◽  
Data Availability ◽  
Bad News ◽  
General Tendency ◽  
Litigation Risk ◽  
Novel Approach ◽  
Conflicting Evidence ◽  
Short Interest

ABSTRACT Prior studies provide conflicting evidence as to whether managers have a general tendency to disclose or withhold bad news. A key challenge for this literature is that researchers cannot observe the negative private information that managers possess. We tackle this challenge by constructing a proxy for managers' private bad news (residual short interest) and then perform a series of tests to validate this proxy. Using management earnings guidance and 8-K filings as measures of voluntary disclosure, we find a negative relation between bad-news disclosure and residual short interest, suggesting that managers withhold bad news in general. This tendency is tempered when firms are exposed to higher litigation risk, and it is strengthened when managers have greater incentives to support the stock price. Based on a novel approach to identifying the presence of bad news, our study adds to the debate on whether managers tend to withhold or release bad news. Data Availability: Data used in this study are available from public sources identified in the study.

scholarly journals Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage

2015 ◽  
Vol 105 (12) ◽  
pp. 3766-3797 ◽  
Author(s):  
Alex Edmans ◽  
Itay Goldstein ◽  
Wei Jiang
Keyword(s):  
Private Information ◽  
Firm Value ◽  
Bad News ◽  
Good News ◽  
Asymmetric Effect ◽  
Trading Behavior ◽  
Feedback Effects ◽  
Limits To Arbitrage ◽  
Corporate Decisions ◽  
Fundamental Value

We analyze strategic speculators’ incentives to trade on information in a model where firm value is endogenous to trading, due to feedback from the financial market to corporate decisions. Trading reveals private information to managers and improves their real decisions, enhancing fundamental value. This feedback effect has an asymmetric effect on trading behavior: it increases (reduces) the profitability of buying (selling) on good (bad) news. This gives rise to an endogenous limit to arbitrage, whereby investors may refrain from trading on negative information. Thus, bad news is incorporated more slowly into prices than good news, potentially leading to overinvestment. (JEL D83, G12, G14)

Restrictions on Managers' Outside Employment Opportunities and Asymmetric Disclosure of Bad versus Good News

2018 ◽  
Vol 94 (5) ◽  
pp. 1-25 ◽  
Author(s):  
Ashiq Ali ◽  
Ningzhong Li ◽  
Weining Zhang
Keyword(s):  
Opposite Effect ◽  
Career Concerns ◽  
Bad News ◽  
Good News ◽  
Corporate Disclosure ◽  
Employment Opportunities ◽  
Disclosure Policy ◽  
The U.S ◽  
Jel Classifications

ABSTRACT This study examines the effect of restrictions on managers' outside employment opportunities on voluntary corporate disclosure. The recognition of the Inevitable Disclosure Doctrine (IDD) by courts in the U.S. states in which the firms are headquartered places greater restrictions on their managers from joining or forming a rival company. We find that, on average, the IDD adoption increases the asymmetric withholding of bad news. We further show that the IDD adoption increases the asymmetric withholding of bad news relative to good news for firms whose managers are mainly concerned about losing their current job. However, an opposite effect is observed for firms whose managers are mainly interested in seeking promotion elsewhere. Furthermore, these effects are less pronounced for firms subject to greater monitoring of their disclosure policy. These results suggest that managers' career concerns affect corporate disclosure policy, and the effect varies with the type of career concerns. JEL Classifications: D82; M4.

Strategic Disclosures of Litigation Loss Contingencies When Customer-Supplier Relationships Are at Risk

2017 ◽  
Vol 93 (2) ◽  
pp. 137-159 ◽  
Author(s):  
Ling Cen ◽  
Feng Chen ◽  
Yu Hou ◽  
Gordon D. Richardson
Keyword(s):  
At Risk ◽  
Supply Chain ◽  
Repeated Game ◽  
Bad News ◽  
Good News ◽  
Supplier Relationships ◽  
Strategic Disclosure ◽  
Disclosure Patterns ◽  
Jel Classifications

ABSTRACT In the presence of litigation-facing suppliers, the supply chain relationship is at risk. Suppliers with principal customers (dependent suppliers) have a higher concentration of sales to customers, and they are more at risk relative to suppliers without principal customers (non-dependent suppliers). As a result, we predict and find that litigation disclosure patterns differ for the two supplier types: dependent suppliers are more likely to delay bad news and accelerate good news related to litigation outcomes, compared to non-dependent suppliers. Such strategic disclosure patterns in our end-game setting are opposite to those documented in the existing supply chain literature for the repeated-game setting (for example, Hui, Klasa, and Yeung 2012). JEL Classifications: M41; M48; K22.

Voluntary Disclosure Incentives and Earnings Informativeness

2012 ◽  
Vol 87 (5) ◽  
pp. 1679-1708 ◽  
Author(s):  
Sugata Roychowdhury ◽  
Ewa Sletten
Keyword(s):  
Voluntary Disclosure ◽  
Information Source ◽  
Data Availability ◽  
Bad News ◽  
Good News ◽  
Cross Sectional ◽  
Earnings Differential ◽  
Earnings Informativeness ◽  
Negative News ◽  
Disclosure Incentives

ABSTRACT We propose that the value of the earnings reporting process as an information source lies in limiting delays in the release of bad news, either by inducing managers to disclose it voluntarily or by directly releasing the negative news that managers have incentives to withhold. We compare earnings informativeness in bad-news and good-news quarters. Using returns to measure news, we find, consistent with our prediction, that earnings informativeness relative to other sources is higher in bad-news quarters than in good-news quarters. Further, cross-sectional tests indicate that earnings differential informativeness in bad-news quarters is more pronounced when managers do not voluntarily disclose the news, information asymmetry is stronger, and managers are net sellers of stock. JEL Classifications: G3; M4; M40; M41; M48. Data Availability: Data are available from Compustat, CRSP, First Call, I/B/E/S, ISSM, TAQ, and Thompson Financial.

scholarly journals The Roles that Forecast Surprise and Forecast Error Play in Determining Management Forecast Precision

2010 ◽  
Vol 24 (2) ◽  
pp. 165-188 ◽  
Author(s):  
Jong-Hag Choi ◽  
Linda A. Myers ◽  
Yoonseok Zang ◽  
David A. Ziebart
Keyword(s):  
Voluntary Disclosure ◽  
Forecast Error ◽  
Absolute Magnitude ◽  
Negative Association ◽  
Bad News ◽  
Good News ◽  
Forecast Errors ◽  
Negatively Associated ◽  
Management Forecast ◽  
Forecast Precision

SYNOPSIS: Studying the determinants of management forecast precision is important because a better understanding of the factors affecting management’s choice of forecast precision can provide investors and other users with cues about the characteristics of the information contained in the forecasts. In addition, as regulators assess the regulation of voluntary management disclosures, they need to better understand how managers choose among forecast precision disclosure alternatives. Using 16,872 management earnings forecasts collected from 1995 through 2004, we provide strong evidence that forecast precision is negatively associated with the magnitude of the forecast surprise and that this negative association is stronger when the forecast is bad news than when it is good news. We also find that forecast precision is negatively associated with the absolute magnitude of the forecast error that proxies for the forecast uncertainty that managers face when they issue forecasts, and that the negative association is stronger when forecast errors are negative. These results are consistent with greater liability concerns related to bad news forecasts and negative forecast errors, respectively. Our study provides educators and researchers with important insights into management’s choice of earnings forecast precision, which is a component of the voluntary disclosure process that is not well understood.

Asymmetric Reporting Timeliness and Informational Feedback

2020 ◽  
Author(s):  
Qi Chen ◽  
Zeqiong Huang ◽  
Xu Jiang ◽  
Gaoqing Zhang ◽  
Yun Zhang
Keyword(s):  
Private Information ◽  
Firm Value ◽  
Reporting System ◽  
Bad News ◽  
Good News ◽  
Price Informativeness ◽  
Managerial Incentive ◽  
Asymmetric Timeliness ◽  
Investment Level ◽  
Incentive Problems

We examine the effects of asymmetric timeliness in reporting good versus bad news on price informativeness when prices provide useful information to assist firms’ investment decisions. We find that a reporting system featuring more timely disclosure of bad news than of good news encourages speculators to trade on their private information. Consequently, it generates a higher expected investment level and firm value. Our analysis generates predictions consistent with empirical findings and provides a justification for the more timely reporting of bad news in the absence of managerial incentive problems. This paper was accepted by Brian Bushee, accounting.

The Effect of Voluntary Disclosure and Preemptive Preannouncements on Earnings Response Coefficients (ERC) When Firms Manage Earnings

2003 ◽  
Vol 18 (3) ◽  
pp. 379-409 ◽  
Author(s):  
Joshua Ronen ◽  
Tavy Ronen ◽  
Varda (Lewinstein) Yaari
Keyword(s):  
Earnings Management ◽  
Voluntary Disclosure ◽  
Bad News ◽  
Good News ◽  
Earnings Response Coefficients ◽  
Earnings Response Coefficient ◽  
Earnings Surprise ◽  
Response Coefficient ◽  
Earnings Response ◽  
Disclosure Strategy

We study analytically the effect of preliminary voluntary disclosure and preemptive preannouncement on the slope of the regression of returns on earnings surprise—the earnings response coefficient (ERC). When firms do not manage earnings, additional disclosure has no effect, and the ERC is proportional to price/permanent earnings ratio. If they manage earnings by attempting to inflate them, the response to (100% credible) negative earnings surprise is stronger than the response to (less than 100% credible) positive surprise. To avert litigation, firms that manage earnings adopt a partial voluntary disclosure strategy—either public revelation of good news and withholding bad news, or public revelation of bad news and withholding good news. Voluntary disclosure affects ERC on positive earnings surprise only, depending on what the firm reveals: the good- news revealing ERC (GRC) is higher than the bad-news revealing ERC (BRC), because good news enhances the credibility of the positive earnings surprise, even though the market discounts good news. Furthermore, preemptive pre-announcements improve ERC accuracy by narrowing the scope of earnings management.

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