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Why managers with low forecast precision select high disclosure intensity: an equilibrium analysis

Gietzmann, Miles B. and Ostaszewski, Adam J. (2014) Why managers with low forecast precision select high disclosure intensity: an equilibrium analysis. Review of Quantitative Finance and Accounting, 43 (1). pp. 121-153. ISSN 0924-865X

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Abstract

Shin (J Account Res 44(2):351–379, 2006) has argued that in order to understand the equilibrium patterns of corporate disclosure, it is necessary for researchers to work within an asset pricing framework in which corporate disclosures are endogenously determined. Echoing this sentiment, Larcker and Rusticus (J Account Econ 49(3):186–205, 2010) have argued that earlier empirical results claiming to find a negative relationship between disclosure and cost of capital may suffer fatally from endogeneity issues which, once addressed by a formal structural model, may reverse the sign of the relationship. The purpose of this paper is to introduce a general equilibrium model following the Black–Scholes paradigm with endogeneous disclosure in which firms select uniquely determined optimal probabilities of early equity-value discovery in a noisy environment. As firms may differ also in the uncertainty (precision) with which management can forecast the future, managers strategically increase the intensity of their (voluntary) disclosures to provide partial compensation for this perceived differential risk. A positive relationship then results between disclosure and the cost of capital.

Item Type: Article
Official URL: http://link.springer.com/journal/11156
Additional Information: © 2014 Springer Science+Business Media New York
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Q Science > QA Mathematics
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Sets: Departments > Mathematics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 31 May 2013 08:26
URL: http://eprints.lse.ac.uk/50494/

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