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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IWH Discussion Papers ; No. 25/2016

Classification and Topics

• Classification: Wirtschaft ; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games ; Asymmetric and Private Information; Mechanism Design ; Corporate Finance and Governance: General ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: repeated games ; asymmetric information ; firms ; reputation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gropp, Reint E. ; Karapandza, Rasa ; Opferkuch, Julian
• Event: Veröffentlichung
• (who): Leibniz-Institut für Wirtschaftsforschung Halle (IWH)
• (where): Halle (Saale)
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/144512
• URN: urn:nbn:de:gbv:3:2-59323
• Last update: 10.03.2025, 11:42 AM CET