The Determinants of the Amount of Information Disclosed About Corporate Restructurings
49 Pages Posted: 19 Nov 1999
Date Written: October 1999
This paper examines the information voluntarily disclosed about corporate restructurings. Prior to 1994, firms had a great deal of discretion regarding the information disclosed about these events. In 1995 the FASB's Emerging Issues Task Force (EITF) reached a consensus opinion about mandatory restructuring disclosures. I use these requirements to construct a statistic that measures the amount of information voluntarily disclosed for a sample of firms from 1990-1993. A survey of security analysts validates the use of the EITF requirements as a disclosure metric. I then estimate a cross-sectional model to assess whether the amount of information disclosed is associated with empirical proxies for hypothesized determinants.
Results indicate that disclosure levels are positively associated with post-restructuring firm performance, suggesting that management provides more information when they forecast good news. The study documents a negative relation between disclosure levels and the appointment of a new CEO prior to the restructuring. This result is consistent with new CEOs lowering disclosure levels to mask earnings management via restructuring charges, although supplemental tests of this hypothesis are not conclusive. Results also indicate that when stockholder-manager agency conflicts are reduced through increased monitoring, disclosure levels are higher. This result has implications for policy makers by documenting that increased monitoring serves as a substitute for mandatory disclosure rules, though this study does not address which alternative is more cost effective. There are mixed results regarding the association between the amount of information disclosed and the strength of organized labor, a proxy for proprietary costs. Certain disclosures (forecasts of the restructuring's effect on future income and cash flows) are less likely when facing a strong union, suggesting that proprietary costs deter disclosure. Conversely, other disclosures (the restructuring's expected effect on employees) are more likely, suggesting that the benefit of communicating this information to investors outweighs the proprietary cost of revealing it to the union. Competitive proprietary costs appear to deter extensive disclosures; when few companies in the firm's industry record negative special charges, the firm provides less restructuring information.
JEL Classification: M41, M43, M45
Suggested Citation: Suggested Citation