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CFGT-2: Disclosure and News
The Forward-Looking Disclosures of Corporate Managers: Theory and Evidence
1Goethe University Frankfurt; 2Halle Institute for Economic Research; 3European Business School
We consider an infinitely repeated game in which a privately informed, long-lived manager raises funds from short-lived investors in order to finance a project. The manager can signal project quality to investors by making a (possibly costly) forward-looking disclosure about her project's potential for success. We find that if the manager's disclosures are costly, she will never release forward-looking statements that do not convey information to external investors. Furthermore, managers of firms that are transparent and face significant disclosure-related costs will refrain from forward-looking disclosures. In contrast, managers of opaque and profitable firms will follow a policy of accurate disclosures. To test our findings empirically, we devise an index that captures the quantity of forward-looking disclosures in public firms' 10-K reports, and relate it to multiple firm characteristics. For opaque firms, our index is positively correlated with a firm's profitability and financing needs. For transparent firms, there is only a weak relation between our index and firm fundamentals. Furthermore, the overall level of forward-looking disclosures declined significantly between 2001 and 2009, possibly as a result of the 2002 Sarbanes-Oxley Act.
Optimal Leverage and Strategic Disclosure
University of Rochester
I consider a market where firms compete under costly-state-verification and can commit to disclose information about future profits (e.g., going public). The cost of disclosure increases in the signal to noise ratio, and disclosure externalities 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, as a result, equilibrium leverage is excessively high. Regulators might intervene setting disclosure and capital standards. The limited commitment extension of the model provides similar qualitative insights, and it uncovers a scope for issuing disclosure-based options.
Spillovers from "Good-News" and Other Bankruptcies: Real Effects and Price Responses
University of Texas at Dallas
We model debt restructurings that can endogenously end in bankruptcy, and study spillovers to competitors' operating decisions, restructuring outcomes and security prices. We show that, while bankruptcy may cause the firm's share price to drop, bankruptcy always signals good news about the firm. We identify the conditions under which a bankruptcy also signals good news for competitors. We demonstrate that, when information asymmetry about a firm's prospects is high, bankruptcy raises its share price and prices of its competitors' debt, while lowering the competitors' share prices and probability of bankruptcy. When there is little information asymmetry about the firm's prospects or the information asymmetry is about industry prospects, bankruptcy raises competitors' share prices and probability of bankruptcy, but lowers their debt prices.
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Conference: EFA 2017
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