Mandatory and Voluntary Disclosures: Dynamic Interactions

• DOI: http://doi.org/10.1111/1475-679X.12210
• Author: DAVIDE CIANCIARUSO,SRI S. SRIDHAR
• Published date: 01 September 2018
• Date: 01 September 2018

DOI: 10.1111/1475-679X.12210

Journal of Accounting Research

Vol. 56 No. 4 September 2018

Printed in U.S.A.

Mandatory and Voluntary

Disclosures: Dynamic Interactions

DAVIDE CIANCIARUSO

∗AND SRI S. SRIDHAR

†

Received 2 December 2014; accepted 5 March 2018

ABSTRACT

Firms sometimes obtain soft private information about growth prospects

along with hard information about current or past performance. In this en-

vironment, we find that optimizing disclosures over multiple periods yields

nonlinear stock price reactions following both voluntary and mandatory dis-

closures. Further, we derive several predictions about distinct short-run and

long-run effects of disclosures and nondisclosures on security prices. Under

specified conditions, when the volatility of the firm’s earnings increases, the

average contemporaneous and prospective post-mandatory-disclosure market

premia (for voluntary disclosures over nondisclosures) rise, while farther-in-

future market discounts (for such voluntary disclosures) also become larger.

Our analysis moreover predicts that both the disclosure probability and the

information content of nondisclosures can increase in the persistence of

earnings.

∗Department of Accounting and Management Control, HEC Paris; †Department of

Accounting Information & Management, Kellogg School of Management, Northwestern

University.

Accepted by Haresh Sapra. We are grateful to an anonymous referee for valued sug-

gestions. We also thank Jeremy Bertomeu, Sofya Budanova, Ronald Dye, Hans Frimor (dis-

cussant), Ilan Guttman, Xu Jiang (discussant), Dor Lee-Lo, Thomas Lys, Robert Magee,

Ivan Marinovic, Joshua Ronen, Jack Stecher (discussant), Beverly Walther, as well as other

seminar participants at Northwestern University and NYU Stern School of Business, at

the 2015 FARS Midyear Meeting, the 9th Accounting Research Workshop in Zurich, and

the 2015 AAA Annual Meeting. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

1253

CUniversity of Chicago on behalf of the Accounting Research Center,2018

1254 D.CIANCIARUSO AND S.S.SRIDHAR

JEL codes: D21; D82; D83; G14; M41

Keywords: mandatory disclosure; voluntary disclosure; dynamic; multiple

periods; growth; signaling; hard and soft information

1. Introduction

Recent empirical literature highlights the emergence of two large classes of

economic forces that shape corporate disclosures. First, firms increasingly

rely on intangibles (including intellectual property rights, patents, brand

names, networking effects, etc.) to generate greater value for shareholders.

Such soft information is difficult to communicate credibly and is often

cited as a factor that has contributed to the empirically measured decrease

in the association between firms’ earnings disclosures and stock prices over

the years (Srivastava [2014]). Second, several empirical studies emphasize

the economic significance of intertemporal forces in influencing the

disclosure behavior of firms (e.g., Lipe [1990], Imhoff and Lobo [1992],

Kothari, Shu, and Wysocki [2009], Chen, Cheng, and Lo [2010], Dechow,

Ge, and Schrand [2010]).

Given this empirical evidence, it is important to understand how firms

manage their voluntary disclosures over multiple periods, both before and

after mandatory disclosures. To this end, we consider a two-period setting

where a manager privately observes in each period, with some probabil-

ity, the realization of the current earnings ahead of the mandatory an-

nouncement date.1In addition, whenever the manager learns the first-

period earnings, he also privately learns the expected value of the firm’s

growth prospects. If informed, the manager decides whether to make a vol-

untary disclosure of the current earnings to the public. We assume that the

information about current earnings is hard and, therefore, the manager

can credibly disclose it. In contrast, we assume that the information about

growth prospects is soft and thus the manager cannot credibly report it.

In this setting, we show that voluntary disclosures of relatively unfavor-

able past performance can occur in the first period as a way to signal

soft information about better future growth prospects.2The firm’s ability

to implicitly communicate its soft information on growth prospects in a

1We use the terms “firm” and “manager” interchangeably depending on the context.

2This equilibrium disclosure behavior is consistent with empirical evidence. Skinner and

Sloan [2002] assert that “negative earnings news is frequently preannounced for growth

stocks” (p. 290). In their survey of executives on the determinants of reported earnings

and disclosure decisions, Graham, Harvey, and Rajgopal [2005] report that sales growth is

strongly and positively correlated with earnings guidance. Moreover, they find that the sales

growth rate of firms that claim to release bad news faster than good news is 9.4%, whereas

the sales growth rate is −0.9% for firms that claim to release good news faster than bad

news. In other words, high growth firms are more inclined to release bad news in a more

timely manner. In an experimental setting, Libby and Tan [1999] examine analysts’ beliefs

about firms that do and do not issue negative earnings warnings and find that approxi-