What Drives Voluntary Disclosure – Manager Cost or Investor Demand?: Evidence from Derivatives Use
54 Pages Posted: 12 Sep 2017 Last revised: 3 Aug 2018
Date Written: July 26, 2018
This study examines how a significant day-to-day operating activity (i.e., risk management through the use of derivatives) affects managers’ disclosure decisions. Specifically, the derivatives setting provides insights to understand how managers respond to investor demand for disclosure depending on the cost of providing such disclosure. We provide several main findings. We find that managers are more likely to provide management forecasts after beginning the use of derivatives; however, such an increase in forecasts only occurs when derivatives use makes it easier to predict future performance and meet or beat future forecasts (i.e., when the managers’ personal cost to disclose is low). In fact, managers facing high investor demand for disclosure remain silent or even reduce the number of forecasts provided when their personal cost to disclose is high. We also find that these “low cost” forecasts provide no incremental information to analysts. On the other hand, while costly management forecasts have the potential to significantly improve analyst forecast accuracy, managers are reluctant to issue such forecasts. Overall, our results imply that – in deciding whether to provide voluntary disclosure – managers consider their own interests (i.e., their career and reputation concerns) before the interests of shareholders (i.e., meeting investor demand).
Keywords: voluntary disclosure, management forecasts, derivatives, hedge accounting
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