Disclosure Dynamics and Investor Learning
53 Pages Posted: 14 Feb 2017 Last revised: 8 Mar 2020
Date Written: February 11, 2017
This paper examines whether investor learning about profitability (i.e., the mean of earnings distribution) leads to persistence in disclosure decisions. A repeated single-period model shows that persistent investor beliefs about profitability lead to persistent disclosure decisions. Using earnings forecast data, I structurally estimate the model and perform several counterfactual analyses. I find that, when investors are assumed to know profitability, the persistence of management forecast decisions significantly declines by 17% to 27%, and 24% of firms would have disclosed differently, resulting in 3.9% net change in the amount of information (i.e., posterior variance) provided to the capital market. Collectively, the results indicate the importance of learning profitability in understanding disclosure decisions and the capital market consequences of disclosures.
Keywords: Persistence of disclosure decisions, Earnings forecasts, Investor learning, Parameter uncertainty, Bayesian estimation, Dynamics of disclosures
JEL Classification: M41, C11, D83
Suggested Citation: Suggested Citation