The Role of the Manager's Human Capital in Discretionary Disclosure

Abstract

This study shows that managers' concerns about performance evaluation can affect their discretionary disclosure decisions. Building on Verrecchia's [1983] demonstration that an (unidentified) cost of disclosing can preclude disclosure in the presence of rational expectations, researchers have identified several forms of disclosure costs, such as threat of entry and other competitive concerns (Darrough and Stoughton [1990], Gigler [1994], and Hayes and Lundholm [1996]). This stream of literature has assumed that the shareholders and the managers have the same objectives. I extend this literature by separating the concerns of the managers from those of the shareholders and characterize discretionary disclosure as a function of manager-specific variables such as managerial performance assessment. In my model, earnings are produced by the manager's human capital and firm-specific assets. The manager is privately informed about the components of earnings and has the discretion to disclose this information. If the manager discloses, he is uncertain about the resulting revision in the capital market's assessment of his human capital. Revisions