Voluntary Disclosure, Moral Hazard and Default Risk

46 Pages Posted: 12 Feb 2018 Last revised: 16 Oct 2019

See all articles by Shiming Fu

Shiming Fu

School of Finance, Shanghai University of Finance and Economics

Giulio Trigilia

University of Rochester - Simon Business School

Date Written: February 23, 2018

Abstract

We study a dynamic moral hazard setting where the manager has private ev- idence that predicts the firm's cash flows. When performance is low, bad news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case. In contrast, no disclosure is associated with higher borrowing costs. On net, disclo- sure weakens the relation between cash incentives (or stock values) and short-term performance, which lowers the firm’s default risk on path. However, the expecta- tion of future disclosure might increase the optimal initial level of debt, to a point where the firm’s default risk actually rises relative to the no-evidence case.

Keywords: voluntary disclosure, credit spreads, default risk, dynamic moral hazard, funding liquidity, information technologies, real options

JEL Classification: G32, D86, D61

Suggested Citation

Fu, Shiming and Trigilia, Giulio, Voluntary Disclosure, Moral Hazard and Default Risk (February 23, 2018). Available at SSRN: https://ssrn.com/abstract=3120665 or http://dx.doi.org/10.2139/ssrn.3120665

Shiming Fu

School of Finance, Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Giulio Trigilia (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
140
Abstract Views
921
Rank
309,649
PlumX Metrics