The forward-looking disclosures of corporate managers: Theory and evidence

Reint Gropp, Rasa Karapandza and Julian Opferkuch

No 140, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: 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.

Keywords: repeated games; asymmetric information; firms; reputation (search for similar items in EconPapers)
JEL-codes: C73 D82 G30 L14 (search for similar items in EconPapers)
Date: 2016
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Working Paper: The forward-looking disclosures of corporate managers: Theory and evidence (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:140

DOI: 10.2139/ssrn.2810202

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