The Ability of Employee Disclosures to Reveal Private Information Withheld by Managers

Abstract

Managers may provide incomplete disclosure due to having various contracting, proprietary, agency, and other incentives leading them to withhold information. Employees do not face similar incentives and, through “wisdom of the crowd” displayed on social media, have the ability to aggregate their individual beliefs to provide informative business outlook. Thus, the extent to which employee disclosures provide information not revealed in management disclosures provides an indication of managers’ strategy in withholding private information. To test this idea, we use employee business outlook ratings on Glassdoor.com and examine the extent to which they reveal incremental information on loan spreads in private lending contracts. As expected, we find that employee disclosures reveal more private information as the quality of management disclosures decreases. We also show that this relation is more prominent when employees are expecting worsening performance, consistent with employee disclosures revealing more private bad news when managers have stronger incentives to withhold information. Our study demonstrates the potential of employee disclosures on social media to generate and disseminate private information being withheld by managers.

Keywords: Employee opinions, crowd widsom, voluntary disclosures, private information, business outlook

JEL Classification: D82, D83, G10, G21, M40, M41