Strategic Disclosure Research Articles

Optimal Leverage and Strategic Disclosure

I consider a market where firms compete under costly-state-verification (CSV) and can commit to disclose information about future profits. The cost of disclosure increases in the signal to noise ratio, and disclosure might benefit other firms by improving the information environment. I characterize the jointly optimal disclosure policy and capital structure, and show that the two are deeply intertwined. The optimal capital structure consists of a mixture of debt and equity, and leverage is negatively correlated to transparency. Because of information externalities, firms under-disclose relative to the constrained best, and equilibrium leverage is excessively high. Regulators might intervene setting disclosure and capital standards.The limited commitment extension of the model provides similar qualitativeinsights, and an even stronger role for regulation.

The effect of voluntary disclosure on stock liquidity: New evidence from index funds

This study tests whether voluntary disclosure affects stock liquidity. I argue that index funds fit the profile of nonstrategic traders who, according to theory, are unambiguously more likely than managers and strategic investors to prefer high stock liquidity and thus high disclosure. This suggests that I can use index funds' disclosure preferences to construct an empirical model of voluntary disclosure that abstracts away from managers' strategic disclosure motives. Accordingly, I use an index-fund setting to construct a recursive structural equation model of voluntary disclosure, index fund ownership, and liquidity. I find that when a firm joins the S&P 500 index, voluntary disclosure increases with the level of ownership assumed by index funds, and this increase in disclosure is associated with increased stock liquidity. These results imply that voluntary disclosure increases stock liquidity.

Managing Reputation: Evidence from Biographies of Corporate Directors

We examine how corporate directors manage reputation through disclosure choices in biographies in proxy statements filed with the SEC. Directors are more likely to withhold information about directorships at firms that experienced adverse events. Withholding such information is associated with more favorable stock price reactions at appointment and loss of fewer subsequent directorships. Non-disclosure of directorships is significantly reduced following changes to SEC rules, with the greatest change being for adverse-event directorships. These findings suggest that reputation concerns of corporate directors lead to strategic disclosure choices that have real consequences in both capital and labor markets.

Speculation with Information Disclosure

Sophisticated financial market participants frequently choose to disclose private information to the public — a phenomenon inconsistent with most theories of speculative trading. In this paper, we propose and test a model to bridge this gap. We show that when a speculator cares about both the short-term value of her portfolio and her long-term profit, information disclosure is incentive compatible: Disclosure in the form of a mixture of fundamental information and the speculator’s position induces competitive dealership to revise prices in the direction of the speculator’s position. Using mutual fund disclosure through newspaper articles, we find that when fund managers have stronger estimated ex ante short-term incentives, the frequency of strategic disclosures about stocks in their portfolios increases and those stocks’ liquidity improves, consistent with our model.

Meet-the-competition clauses and the strategic disclosure of product quality

Abstract I examine the implications of meet-the-competition clauses (MCCs) for the strategic disclosure of product quality in a duopoly in which sellers can adopt these clauses before setting their prices. I show that MCCs generate incentives for the disclosure of product quality because these clauses facilitate monopoly pricing in states of nature in which the quality of products is the same. This suggests that MCCs may encourage the disclosure of information because sellers can use them to coordinate their pricing decisions based on the information revealed through disclosure.

Are managers strategic in reporting non-earnings news? Evidence on timing and news bundling

Using a comprehensive sample of non-earnings 8-K filings from 2005 to 2013, we examine whether firms strategically report mandatory and voluntary news. In particular, we examine whether firms report negative news when investor attention is low and whether they bundle positive and negative news. Our findings support the notion that managers believe in the existence of investor inattention and strategically report negative news after trading hours. These results particularly apply to public firms, where equity market pressures provide stronger incentives to mitigate market reaction to news by exploiting investor inattention. Further analysis of the market reaction to strategic disclosure uncovers no evidence of investor inattention, consistent with market efficiency. We also observe that public firms are more likely to strategically disclose through news bundling and that the likelihood of this increases with the likelihood of strategic disclosure through timing.

STRATEGIC DISCLOSURE OF MEANINGFUL INFORMATION TO RIVAL

I study a model of strategic disclosure of a private signal to a rival in the presence of a payoff externality. In the model, two agents forecast the unknown true state of a future period. Specifically, the quality of the signal is also private information. Hence, which quality of signal is revealed for which incentive is the main question of interest. I show that, even when disclosure is costly, the revealing equilibrium, where an agent voluntarily reveals his signal, can exist and it should be a monotone equilibrium. Asymmetry between the penalty for an incorrect forecast and the reward for a correct forecast is a necessary condition for the existence of this revealing equilibrium. If the penalty is larger than the reward, the unique revealing equilibrium is a separating equilibrium, where only the low quality signal is disclosed in order to induce the rival's imitation. On the other hand, if the reward is much larger than the penalty, the unique revealing equilibrium is a pooling equilibrium, where the signal is always revealed in order to induce the rival's deviation. If the reward is not much larger than the penalty, no revealing equilibrium is robust to a costly disclosure. (JEL D81, D82)

Strategy, Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures

Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001–2012, we present evidence of both a security price reaction and an increase in the accuracy of analysts’ earnings forecasts pursuant to plan disclosure. In the cross-section, the information content of the plan disclosures and the accuracy increase are incrementally associated with the extent of forward-looking narrative disclosures in the plan, after controlling for other disclosures within and outside the plan presentation and the fact that the firm has self-selected into the sample. Both quantitative and qualitative narrative disclosures are informative to investors and analysts. The results are driven by narrative disclosures about company strategy and action plans rather than about the business environment in which the company operates. Our study informs the current debate on the use of voluntary comprehensive, integrated, long-run-oriented strategic plan disclosure as a potential complement for disclosures such as quarterly earnings forecasts that have been described as an example of ‘short-termism’.

Overcoming Coordination Failure in a Critical Mass Game: Strategic Motives and Action Disclosure

We study whether coordination failure is more often overcome if players can easily disclose their actions. In an experiment subjects first choose their action and then choose whether to disclose this action to other group members, and disclosure costs are varied between treatments. We find that no group overcomes coordination failure when action disclosure costs are high, but half of the groups do so when the costs are low. Simulations with a belief learning model can predict which groups will overcome coordination failure, but only if it is assumed that players are either farsighted, risk-seeking or pro-social. To distinguish between these explanations we collected additional data on individual preferences and the degree of farsightedness. We find that in the low cost treatment players classified as more farsighted more often deviate from an inefficient convention and disclose this action, while the effect of risk and social preferences is not significant.

Dynamic R&D Competition under Uncertainty and Strategic Disclosure

We study a model of dynamic two-stage R&D competition where the competing firms are uncertain about the difficulty of the first stage. Staying in the competition is costly and a firm can also choose whether and when to quit. When a firm solves the first stage, it can choose whether and when to disclose the solution. We find that there exists a unique symmetric equilibrium, in which each firm will disclose the solution of the first stage if it arrives early, withhold the solution if it arrives neither too soon nor too late, and exit the competition if it has not arrived after a sufficiently long time. From a social welfare perspective, a competition is surprisingly not always optimal: in certain scenarios, it is socially more desirable to assign the R&D project to a single firm.

IP Strategy and Use of IP Protection Mechanisms Across Firm Size: An Empirical Investigation

In this paper we use data from the 2012 Innovation Strategy Survey (485 responses) to compare motives and choices with respect to IP strategy in firms with sizes ranging from micro to very large. Our results confirm significant differences across firm size when it comes to strategic goals, availability of means to deal with open innovation environments, the ability to generate licensing revenues, as well as the in the practice and motivations for the use of non-patenting disclosure. We find, for example, that the potential of licensing as a means of appropriating value only holds in the context of the very large firms, which has implications for the IP strategy of smaller actors. Likewise, we also begin to see a pattern emerging concerning the openness of firms’ innovation strategy wherein the extremes of the firm-size scale tend to express similar behavior but for apparently different reasons; thus they apply differing IP strategies. By our interpretation, smaller firms exhibit a predominant preference for open IP strategies while very large firms tend to exhibit more closed IP strategies. We also find that the majority of firms—in particular micro-sized firms—is interested in securing freedom to operate. This provides further reason for us to believe that the practice of strategic disclosure—a competitive and cost effective means to enhance freedom to operate—is underrepresented in awareness and use within integrated IP strategies.

Voluntary Disclosure and Information Intermediaries: Evidence from the Carbon Disclosure Project

Investors, customers, and other stakeholders rely on the information disclosure by firms to evaluate numerous dimensions of the firm’s operations and potential for future profitability. As environmental performance has become increasingly important to customers and investors, intermediaries have developed to fill the void left by the lack of standardized or required reporting and help alleviate the information asymmetry between firms and stakeholders. The ability of these intermediaries to provide accurate and useful information depends on the strategic disclosure of information and reporting by firms. In this paper, we examine one of the largest and most influential intermediaries, the Carbon Disclosure Project, to examine how the contents and the linguistic characteristics of the firm’s survey response determines the CDP scoring, and whether the CDP scores are informative to predict subsequent environmental performance.

Strategic Disclosure Misclassification

We apply modern machine learning techniques to characterize disclosure misclassification by public companies. We find that 12-25% of disclosures are misclassified; those concerning material definitive agreements, executive or director turnover, and delistings are most commonly misclassified. Using EDGAR search traffic data, we provide evidence that misclassification successfully reduces investor attention. Through this attention channel, misclassification leads to a significant and persistent impact on absolute market returns. For misclassified filings, search traffic is 4-12% lower and absolute market reactions are 46-79 bps smaller. Consistent with strategic motives, misclassification is more likely for negative news and when market attention is high.

Do annual reports communicate strategic issues? Insight into reporting practices of high-tech companies / Czy raporty roczne komunikują kwestie strategiczne? Wgląd w praktyki sprawozdawcze spółek wysokich technologii

Due to rapid technological progress high-tech companies are expected to be forward-looking in order to ensure shareholder value creation and respond adequately to customer needs. Moreover, stakeholders may expect that high-tech companies will inform them about strategic plans and related aspects which cover knowledge on current activities and business model, business environment and R&D achievements. Accordingly, this paper examines the extent of strategic disclosures included in 69 annual reports of IT companies listed on the Warsaw Stock Exchange. It explores also whether two factors: market value of a firm and its place of listing are related with the extent of strategic disclosures. Lastly, it scrutinizes whether a place of listing may be perceived as a moderator variable that influences a strength of a relationship between a market value of a firm and the extent of strategic disclosures. The research results suggest that the examined entities reported poorly on R&D activities and sufficiently on risk factors and future perspectives. The developmental strategy was disclosed often, however, only in annual reports of stock issuers listed on the primary market. The in-depth analysis shows that both the firm’s market value and the place of listing may be perceived separately as factors which induce managers to disclose more strategic issues. Nonetheless, the empirical results do not prove that a place of listing moderates an effect between market value and the extent of strategic disclosure.

Strategic disclosure of evidence: Perspectives from psychology and law.

The police frequently present their evidence to suspects in investigative interviews. Accordingly, psychologists have developed strategic ways in which the police may present evidence to catch suspects lying or to elicit more information from suspects. While research in psychology continues to illustrate the effectiveness of strategic evidence disclosure tactics in lie detection, lawyers and legal research challenge these very tactics as undermining fair trial defense rights. Legal research is alive to the problems associated with strategically disclosing evidence to a suspect, such as preventing lawyers from advising the suspect effectively, increasing custodial pressure for the suspect, and worsening working relations between lawyers and police. This paper brings together the opposing research and arguments from the two disciplines of psychology and law, and suggests a new way forward for future research and policy on how the police should disclose evidence.

Strategic Information Disclosure and Bank Lending

We study private firms’ strategic disclosure of financial statements in shaping bank lending decisions and structuring debt contracts in informationally opaque credit markets. Using a unique dataset of loan applications by small businesses to a large bank, we document that the availability of financial statement disclosures by small businesses increases their credit access. Results from debt contract design analyses based on details of booked loans document that such disclosures are significant in pricing loans and in determining collateral requirements, as well as influencing the bank’s ex post monitoring of loan performance. For all these analyses, we also use a staggered regulatory change across states, in disclosure requirements for publicly held companies, as an exogenous shock, and demonstrate the impact on various aspects of small business lending due to private firms’ disclosure choices in response to such disclosure externalities from the public sector.

'You Can't Stop the Bell from Ringing.' Protean, Unpredictable, and Persisting: The Victim Impact Statement in the Context of Sexually Assaulted Women.

The victim impact statement (VIS) is a victim’s voluntarily written account of a range of harms experienced as a consequence of a crime. Rarely is the VIS investigated specific to sexual assault or from a theoretical perspective. This qualitative study was designed to address these gaps. Interviews were conducted with 44 participants who sought or provided VIS-related services in Canada. Findings were analyzed using insights from actor-network theory. Findings of the overall study are presented through three distinct but interrelated papers. “Obliging Detours” (Miller, submitted) describes the development of the VIS in Canada, and its multiple, innovative, and unauthorized pathways of use. These pathways created novel opportunities, demands, and risks for sexual assault victims, particularly those who were mothers, female offenders, or had been excluded at trial. “Relational Caring” (Miller, 2014) identifies an ethic of care that underpinned use of the VIS by sexually assaulted women. Victims prioritized the well-being of others by constructing VIS narratives that privileged the harms experienced by others, protected future victims, and promoted the interests of intimate partner offenders. Victims who were mothers, especially those abused as minors, and those who were intimate partners of their offenders were particularly implicated. “Purposing and Repurposing Harms” (Miller, 2013) demonstrates how harm descriptions were manipulated by victims and others in keeping with, and contrary to, legislators’ design of the VIS. VIS repurposing occurred through victims’ practices of strategic disclosure, which was intended to effect changes in others’ behaviours, and harm peddling, which was the circulation of the VIS in nonsentencing arenas by victims and nonvictims to obtain compensation, child custody, and parole delay. Taken together, the findings revealed that the VIS has a protean nature that is produced by structural and relational factors, and lends itself to multiple uses in multiple contexts. VIS-related outcomes and the effects on victims and others could neither be wholly predicted nor prevented, and involved interactions beyond the criminal court setting. The protean, unpredictable, and persisting positive and negative effects of the VIS hold promise — and danger — for sexual assault victims.

Strategic Disclosure of Demand Information by Duopolists: Theory and Experiment

We study the strategic disclosure of demand information and product-market strategies of duopolists. In a setting where firms may fail to receive information, we show that firms selectively disclose information in equilibrium in order to influence their competitor’s product-market strategy. Subsequently, we analyze the firms’ behavior in a laboratory experiment. We find that subjects often use selective disclosure strategies, and this finding appears to be robust to changes in the information structure, the mode of competition, and the degree of product differentiation. Moreover, subjects in our experiment display product-market conduct that is largely consistent with theoretical predictions.

Voting with Public Information

We study the effect of public information on collective decision-making in committees, where members can have both common and conflicting interests. We show that in the presence of public information, the information aggregated via voting can be extremely limited under the commonly-used simultaneous voting rules, due to the non-existence of a simple and intuitive efficient equilibrium and the existence of a simple and intuitive but inefficient equilibrium. We propose a voting procedure that takes into account the content of the public information, and show that it can facilitate information aggregation by restoring the efficient equilibrium. Our voting procedure also has additional advantages when there is a concern for strategic disclosure of public information.

Strategic disclosure of feasible options

The paper illustrates how people who need to make a joint decision may have an incentive to withhold information regarding the existence of Pareto improving options. The resulting level of inefficiency varies with the way compromises are reached when the parties have to choose among multiple options. Various reasonable compromise rules can be ranked unequivocally, and a rule resulting in a minimal level of inefficiency is identified. Qualitative results extend to sequential disclosure. Enforcing a hard deadline for disclosure may be welfare improving in some circumstances.