Financial Reporting and Supplemental Voluntary Disclosures
AbstractUsing a Verreccia -type model, we study the optimal voluntary disclosure strategy of a manager with private information that helps the market interpret financial information the firm is required to report. In equilibrium, the manager’s disclosure strategy enhances upward or mitigates downward revisions in the market’s estimate of firm value conditional on the firm’s financial reports. Hence, what the manager discloses (large or small values of her private information) and the probability of disclosure depend on the information in the firm’s financial reports. This leads to testable implications regarding the probability of voluntary disclosure (e.g., firms whose financial reports are more surprising provide more voluntary disclosures), and how earnings and revenue response coefficients depend on the manager’s voluntary disclosure strategy. Finally, we show that changes in mandatory disclosure regulations can reduce the probability of voluntary disclosure even though the manager’s private information is used to interpret the firm’s mandatory disclosures.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1186.
Length: 40 pages
Date of creation: Jan 2006
Date of revision:
voluntary disclosure ; financial statements ; earnings surprise ; asymmetric information ; price efficiency ; good news ; bad news;
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-20 (All new papers)
- NEP-FIN-2006-05-20 (Finance)
- NEP-FMK-2006-05-20 (Financial Markets)
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