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Corporate Disclosure and Incentives

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Seaport B
Hosted By: American Finance Association
  • Chair: Ivan Marinovic, Stanford University

Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission

Paul Povel
,
University of Houston
Günter Strobl
,
Frankfurt School of Finance & Management

Abstract

We show that firms may benefit from allowing some earnings management, because it can make noisy signals more informative. We model a firm that cannot observe a manager's cost of effort, her effort choice, and whether she manipulated a publicly observable signal. An optimal contract links compensation to both the eventually realized firm value and the (possibly manipulated) signal, since both are noisy measures of effort provision. It may be optimal to allow for manipulation of the signal by a manager who exerted a high effort level: Doing so can convert a falsely unfavorable signal into a favorable signal, thereby strengthening the link between effort and compensation.

Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations

Thomas Bourveau
,
Columbia University
Guoman She
,
Hong Kong University of Science and Technology
Alminas Zaldokas
,
Hong Kong University of Science and Technology

Abstract

We empirically study how collusion in product markets affects firms’ financial disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms start sharing more detailed information in their financial disclosure about their customers, contracts, and products. This new information potentially benefits peers by helping to tacitly coordinate actions in product markets. Indeed, changes in disclosure are associated with higher future profitability. Our findings suggest that transparency in financial statements can come at the expense of consumer welfare.

Voluntary Disclosure, Moral Hazard and Default Risk

Shiming Fu
,
Shanghai University of Finance and Economics
Giulio Trigilia
,
University of Rochester

Abstract

We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm's cash flows. When performance is low, bad news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case. In contrast, no disclosure is associated with higher borrowing costs. On net, disclosure weakens the relation between cash incentives (or stock values) and short-term performance, which lowers the firm's default risk on path. However, the expectation of future disclosure might increase the optimal initial level of debt, to a point where the firm's default risk actually rises relative to the no-evidence case.
Discussant(s)
Martin Szydlowski
,
University of Minnesota
John Kepler
,
Stanford University
Felipe Varas
,
Duke University
JEL Classifications
  • G3 - Corporate Finance and Governance