Play for Time when the Ship Is Threatening to Sink? Voluntary Disclosure Choices under Going Concern Uncertainty

50 Pages Posted: 6 Oct 2021 Last revised: 28 Oct 2021

See all articles by Hrishikesh Desai

Hrishikesh Desai

Arkansas State University

Daniel Schaupp

WHU - Otto Beisheim School of Management

Date Written: July 21, 2021

Abstract

Prior research on voluntary disclosures has long debated whether managers tend to withhold bad news. However, these studies have been conducted in settings in which, ex-ante, the trade-off between the potential benefits and the potential costs of withholding information is obscure. In this paper, we study voluntary disclosure choices using a context-rich setting of distressed firms in which potential benefits from withholding news (particularly bad news) are seemingly high, whereas the potential costs are seemingly low. Specifically, we focus on the question of how ‘going concern’ uncertainty affects management earnings forecasts in financially distressed firms. Our results suggest that as financial distress intensifies, there is a lower likelihood and frequency of management earnings forecasts, indicating that managers may be withholding news, particularly bad news, in distressed firm-years. For comparative purposes, we also present results for ‘safe’ firm-years and find that managers have a tendency to disclose bad news as the financial health of the firm worsens.

Keywords: financial distress, voluntary disclosures, going concern uncertainty, distressed firms, management earnings forecasts

Suggested Citation

Desai, Hrishikesh and Schaupp, Daniel, Play for Time when the Ship Is Threatening to Sink? Voluntary Disclosure Choices under Going Concern Uncertainty (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3916233 or http://dx.doi.org/10.2139/ssrn.3916233

Hrishikesh Desai (Contact Author)

Arkansas State University ( email )

BU 306, 2007 Aggie Road
College of Business, Arkansas State University
Jonesboro, AR State University 72467-0970
United States
8706808316 (Phone)

Daniel Schaupp

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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