Voluntary Disclosure, Moral Hazard, and Default Risk

Shiming Fu () and Giulio Trigilia ()
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Shiming Fu: School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China
Giulio Trigilia: William E. Simon Graduate School of Business, University of Rochester, Rochester, New York 14627

Management Science, 2024, vol. 70, issue 6, 3447-3469

Abstract: We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm’s cash flows. Bad-news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case, whereas no disclosure leads to higher borrowing costs. For a given capital structure, disclosure reduces the firm’s default risk by lowering its pay-for-performance sensitivity. However, for a set of low-profitability firms, the anticipation of future disclosure of information by managers lowers both firm value and managerial rents at the financing stage because of a reduction in the firm’s initial liquidity. The model can reconcile the empirical evidence on the effects of providing earnings guidance, especially for loss firms.

Keywords: voluntary disclosure; default risk; dynamic moral hazard; funding liquidity; earnings guidance; loss firms; non-GAAP reporting (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3447-3469

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