Disclosure Policy Choices of Stressed Firms in the U.K.
Posted: 12 Jun 1995
This study examines disclosure choices of 81 stressed U.K. firms where stress is represented by the first-time receipt of a modified audit report during 1982-1990. I analyze the general premise that managers of these stressed firms adopt disclosure policies designed to reduce manager' shareholder information differences and thereby reduce perceived undervaluation of their firms' stock prices. Empirical results are consistent with this premise. Modified-report firms made more extensive discretionary disclosures than did comparison firms and disclosure frequency and volume are strongly and positively correlated with proxies for financial stress and restructuring. I also find that managers' decisions to make preemptive disclosure of an expected modified report is positively correlated with the materiality of the news based on two different materiality measures: the auditor's assessment of the seriousness of the underlying condition and the stock price response to initial disclosure of the modified report.
JEL Classification: M41, G12
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