Download this Paper Open PDF in Browser

The Forward-Looking Disclosures of Corporate Managers: Theory and Evidence

SAFE Working Paper No. 140

47 Pages Posted: 16 Jul 2016  

Reint Gropp

Halle Institute for Economic Research

Rasa Karapandza

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting

Julian Opferkuch

Goethe University Frankfurt, Students

Date Written: July 15, 2016

Abstract

We consider an infinitely repeated game in which a privately informed, long-lived manager raises funds from short-lived investors in order to finance a project. The manager can signal project quality to investors by making a (possibly costly) forward-looking disclosure about her project’s potential for success. We find that if the manager’s disclosures are costly, she will never release forward-looking statements that do not convey information to external investors. Furthermore, managers of firms that are transparent and face significant disclosure-related costs will refrain from forward-looking disclosures. In contrast, managers of opaque and profitable firms will follow a policy of accurate disclosures. To test our findings empirically, we devise an index that captures the quantity of forward-looking disclosures in public firms’ 10-K reports, and relate it to multiple firm characteristics. For opaque firms, our index is positively correlated with a firm’s profitability and financing needs. For transparent firms, there is only a weak relation between our index and firm fundamentals. Furthermore, the overall level of forward-looking disclosures declined significantly between 2001 and 2009, possibly as a result of the 2002 Sarbanes-Oxley Act.

Keywords: Repeated Games, Asymmetric Information, Firms, Reputation

JEL Classification: C73, D82, G30, L14

Suggested Citation

Gropp, Reint and Karapandza, Rasa and Opferkuch, Julian, The Forward-Looking Disclosures of Corporate Managers: Theory and Evidence (July 15, 2016). SAFE Working Paper No. 140. Available at SSRN: https://ssrn.com/abstract=2810202 or http://dx.doi.org/10.2139/ssrn.2810202

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Rasa Karapandza

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Julian Opferkuch (Contact Author)

Goethe University Frankfurt, Students ( email )

Frankfurt
Germany

Paper statistics

Downloads
119
Rank
202,766
Abstract Views
826