Do Managers Disclose or Withhold Bad News? Evidence from Short Interest

54 Pages Posted: 1 Aug 2018

See all articles by Dichu Bao

Dichu Bao

Hong Kong Polytechnic University

Yongtae Kim

Santa Clara University - Leavey School of Business

G. Mujtaba Mian

Zayed University

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Date Written: July 12, 2018

Abstract

Prior studies provide conflicting evidence as to whether managers have a general tendency to disclose or withhold bad news. A key challenge for this literature is that researchers cannot observe the negative private information that managers possess. We tackle this challenge by constructing a proxy for managers’ private bad news (residual short interest), based on the level of short interest in the stock, and then perform a series of tests to validate this proxy. Using management earnings guidance and 8-K filings as measures of voluntary disclosure, we find a consistent negative relation between bad-news disclosure and residual short interest, suggesting that managers withhold bad news in general. This tendency, however, is tempered when firms are exposed to higher litigation risk, and it is strengthened when managers have greater incentives to support the stock price. Based on a novel approach to identifying the presence of bad news, our study adds to the debate on whether managers tend to withhold or release bad news.

Keywords: Earnings Guidance, 8-K Filings, Voluntary Disclosure, Short Interest, Short Selling

Suggested Citation

Bao, Dichu and Kim, Yongtae and Mian, G. Mujtaba and Su, Lixin (Nancy), Do Managers Disclose or Withhold Bad News? Evidence from Short Interest (July 12, 2018). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3212921

Dichu Bao

Hong Kong Polytechnic University ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

G. Mujtaba Mian

Zayed University

P.O. Box 19282
College of Business
Dubai, Dubai 19282
United Arab Emirates
+971568120604 (Phone)

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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