The Role of Disclosure in Differentiating the Success and Failure of Distressed Firms

14 Pages Posted: 26 Oct 2007 Last revised: 9 Oct 2009

See all articles by Lori Holder-Webb

Lori Holder-Webb

Western New England University - Department of Accounting and Finance

Jeffrey R. Cohen

Boston College - Department of Accounting

Abstract

The quality of corporate disclosures has drawn increasing levels of criticism from Congress and the SEC. A subject of particularly intense scrutiny and action is the Management's Discussion and Analysis (MD&A). This narrative, intended to provide an inside perspective on the reported results of the firm, is particularly important when attempting to evaluate the investment prospects of the marginal or poorly-performing firm. However, managers may restrict the information content of the disclosure, raising potential concerns about ethical behavior. In this study, we employ a proprietary instrument to measure the quality of MD&A disclosures for a sample of firms entering financial distress. We evaluate the disclosure behavior of these firms in an effort to determine whether changes in the disclosure appear to be motivated primarily by economic or ethical concerns. We find, on average, that firms increase disclosure quality in the year of initial distress. However, sustained increases in disclosure quality are limited to firms that subsequently recover from the distress. The results suggest that observed changes in disclosure are driven primarily by economic considerations, rather than ethical ones, especially in good economic times.

Keywords: Ethics, Disclosure, Management Discussion and Analysis (MD&A), Distress

JEL Classification: M41, M45, G33, G24

Suggested Citation

Holder-Webb, Lori and Cohen, Jeffrey R., The Role of Disclosure in Differentiating the Success and Failure of Distressed Firms. Journal of Business Ethics, Vol. 75, No. 3, 2007. Available at SSRN: https://ssrn.com/abstract=1024642

Lori Holder-Webb (Contact Author)

Western New England University - Department of Accounting and Finance ( email )

United States

Jeffrey R. Cohen

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

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