Play for Time when the Ship Is Threatening to Sink? Voluntary Disclosure Choices under Going Concern Uncertainty
Desai, H., & Schaupp, D. (2022). Play for Time when the Ship is threatening to sink? Voluntary Disclosure Choices under Going Concern Uncertainty. Asia-Pacific Journal of Accounting and Economics (Forthcoming). Publisher: Taylor & Francis
Posted: 6 Oct 2021 Last revised: 19 May 2022
Date Written: July 21, 2021
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 dis-tressed 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 with-holding 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
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