What Drives Voluntary Disclosure – Manager Cost or Investor Demand?: Evidence from Derivatives Use
52 Pages Posted: 12 Sep 2017 Last revised: 26 Mar 2018
Date Written: March 22, 2018
Prior theoretical and empirical research documents the cost and benefits of providing voluntary disclosures. However, more research is needed on how managers trade-off these costs and benefits (Beyer et al. 2010). We exploit the quasi-experimental setting of a firm’s decision to use derivatives, where there is significant variation in the costs and benefits of providing voluntary disclosures depending on the way in which managers use derivatives. We provide several findings. First, we find that, on average, firms with derivatives are more likely to provide management forecasts. However, we find that this relation only holds when managers use derivatives in a way that makes it easier for them to predict future performance and meet or beat those predictions (i.e., managers’ personal cost to disclose is low). In fact, managers facing high investor demand for information remain silent or even reduce the number of forecasts provided when their cost to disclose is high. These results suggest that the first-order determinant for managers’ voluntary disclosure decisions is their personal costs – regardless of investor demand. Finally, we find that “low cost” forecasts provide no incremental information to analysts. Overall, our findings suggest that – at least as it relates to derivatives – managers’ first-order concern when making disclosure decisions is their personal cost of providing the forecasts, and not investor demand for that forecast.
Keywords: voluntary disclosure, management forecasts, derivatives, hedge accounting
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