To Delegate or Not To Delegate? On the Quality of Voluntary Corporate Financial Disclosure and Its Market Impact

Abstract

This study investigates the impact of delegation structure of the top management team upon the quality of corporate voluntary disclosure on financial outcomes. The paper develops two competing hypotheses pertaining to the functional relationship between the degree of delegation and the management forecast accuracy. On the one hand, as indicated by the literature on internal governance, the efficacy of the top management team is optimized when neither CEO nor subordinate managers are dominant. On the other hand, literature has extensively documented the importance and centrality of the CEO as well as the relevancy of the subordinate managers to the voluntary disclosure activities. The empirical findings are in support of an inverted hump shape relationship between the degree of delegation and the quality of voluntary information provision, suggesting that an internal optimality of responsibility sharing between CEO and her immediate subordinates does not exist for internal information production and external information dissemination. Partial delegation and mixed executive duties lead to deteriorating quality of voluntary disclosure. In particular, the paper analyzes several aspects of managerial earnings forecasts (MFs), including bias, error, accuracy and optimism. The uncovered functional shapes are generally persistent across multiple quality metrics for MFs. Consistent with the literature on executive horizon and risk propensity, the inverted hump shape is more significant when the top management team is led by an older CEO. The paper employs an identification strategy of structural equations, controlling for selection bias and reverse causality. The empirical results are more significant in the analysis of structural equations. To theoretically underpin the arguments and empirical findings, a model of internal information production is developed in the framework of Baysian Nash Equilibrium. The paper further documents that when the delegation structure is clear, namely either the CEO or subordinates are in charge, the liquidity of company’s shares improves. The empirical evidence also indicates that the variation of liquidity driven by delegation structure is not actively incorporated in stock prices.