REVISION: Do Managers Tacitly Collude to Withhold Industry-Wide Bad News?
Date Posted: Feb 26, 2013
That managers would choose to withhold firm-specific bad news is not only intuitive, but supported by theory, observed disclosure patterns, and survey responses. When the bad news is industry-wide, however, explaining withholding as a sustainable equilibrium is more complicated. If any one firm chooses to disclose, the news effectively becomes public, creating incentives for other firms to disclose. Withholding is only sustainable if all firms cooperate ("tacitly collude"), which depends on thei
REVISION: The Multinational Advantage
Date Posted: Sep 29, 2012
We investigate whether foreign operations provide U.S. multinational corporations (MNCs) with a competitive advantage by comparing actual firm value to an imputed value. An innovation of our study is the use of foreign firms as benchmarks to estimate the imputed value of foreign MNC operations, which controls for differences in discount rates and expected growth rates across countries. We find robust evidence that multinational networks trade at a premium relative to local firms. This result rec
REVISION: Bundled Forecasts in Empirical Accounting Research
Date Posted: Jun 20, 2012
This paper examines “bundled” forecasts, or management earnings forecasts issued concurrently with earnings announcements, which have evolved to become the most common type of management forecast. We describe the econometric problems associated with measuring bundled forecast news and, in particular, provide evidence that the measurement error in the traditional calculation of forecast news is material and is systematically associated with variables frequently studied in forecast-related res
New: Disclosure Tone and Shareholder Litigation
Date Posted: Nov 02, 2011
We examine the relation between disclosure tone and shareholder litigation to determine whether managers’ use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms’ earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimis
REVISION: Disclosure Quality and Management Trading Incentives
Date Posted: Oct 26, 2011
This study examines whether managers strategically alter disclosure “quality” in response to personal incentives, specifically those derived from trading on their own account. Using changes in market liquidity to proxy for disclosure quality, I find that trading incentives are associated with disclosure quality choices. Tests are performed across three disclosure samples: management forecasts, conference calls and press releases. Consistent with a desire to reduce the probability of litigation,
REVISION: Earnings Guidance and Market Uncertainty
Date Posted: Sep 14, 2011
We study the effect of disclosure on uncertainty by examining how management earnings forecasts affect stock market volatility. Using implied volatilities from exchange-traded options prices, we find that management earnings forecasts, on average, increase short-term volatility. This effect is attributable to forecasts that convey bad news, especially when firms release forecasts sporadically (as opposed to on a routine basis). In the longer run, market uncertainty declines after earnings are
REVISION: Shareholder Litigation and Changes in Disclosure Behavior
Date Posted: May 16, 2011
We examine changes in the disclosure behavior of firms involved in 827 disclosure-related class-action securities litigation cases filed between 1996 and 2005. We find no evidence that the firms in our sample respond to the litigation event by increasing or improving their disclosures to investors. Rather, we find consistent evidence that firms reduce the level of information provided post-litigation. Our results suggest that the litigation process encourages firms to decrease the provision o
REVISION: Disclosure Tone and Shareholder Litigation
Date Posted: May 07, 2011
We examine the relation between disclosure tone and shareholder litigation to determine whether managers’ use of optimistic language increases litigation risk. Using both general-purpose and context-specific text dictionaries to quantify tone, we find that plaintiffs target more optimistic statements in their lawsuits and that sued firms’ earnings announcements are unusually optimistic relative to other firms experiencing similar economic circumstances. These findings are consistent with optimis
REVISION: Strategic Disclosure as an Explanation for Asymmetric Return Volatility
Date Posted: Jul 27, 2007
Strategic disclosure, which we define as the reporting of good news and the withholding of bad news, provides an explanation for a well-documented dynamic pattern in returns: The negative relation between return shocks and conditional return volatility. Black (1976) dubbed this relation the "leverage effect." With strategic reporting, positive share price responses in the event of good news result from news arrival. Negative share price responses, in contrast, are more likely due to an infere
Credibility of Management Forecasts
Date Posted: Jun 16, 2005
We examine how the market's ability to assess the truthfulness of management earnings forecasts affects the extent to which managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying the predictable bias in forecasts. We find that managers more likely to face litigation release less optimistic forecasts than managers less likely to face litigation, and this incentive is dampened when it is more difficult to detect whethe
Credibility of Management Forecasts
Date Posted: Apr 15, 2005
We examine how the market's ability to assess the truthfulness of management earnings forecasts affects how managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying predictable forecast bias. We find managers' willingness to misrepresent their forward-looking information in response to their incentives varies with the market's ability to detect misrepresentation. We examine incentives induced by the litigation environm