Conservative Disclosure

45 Pages Posted: 22 Jun 2007 Last revised: 10 Dec 2017

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: November 1, 2017

Abstract

We analyze a model of voluntary disclosure where investors impose a discount for uncertainty about firm value. We find a commitment to conservative reporting, defined as a requirement that firms disclose bad realizations of economic events, results in firm prices being higher on average. Intuitively, in the absence of mandatory disclosure requirements, managers have incentives to disclose voluntarily information about good realizations and withhold information about bad realizations. Thus, a financial reporting system that requires timely reporting of low realizations results in lower uncertainty and higher firm value. Importantly, we interpret a commitment to conservative reporting to include not only reported earnings, but more broadly any mechanism that commits managers to disclose, such as required footnotes and explanations in corporate filings. Beyond a capital market setting, our model also applies to other adverse selection settings - including governance, litigation, and debt contracting - where timely disclosure of bad news improves efficiency.

Keywords: financial reporting, conservatism, timeliness of loss and gain recognition, contracting, corporate governance, debt contracts

JEL Classification: M41, M44, G30, G10, G12

Suggested Citation

Guay, Wayne R. and Verrecchia, Robert E., Conservative Disclosure (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=995562 or http://dx.doi.org/10.2139/ssrn.995562

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Robert E. Verrecchia (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,673
Abstract Views
4,810
rank
9,553
PlumX Metrics