The effect of stock price on discretionary disclosure
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I examine the impact of exogenous changes in stock prices on voluntary disclosure. Specifically, I investigate whether stock price declines prompt managers to voluntarily disclose firm-value-related information (management forecasts) that was withheld prior to the decline because it was unfavorable but became favorable at a lower stock price. Consistent with my predictions, I find that managers are more likely to release good-news forecasts following larger stock price declines but that there is no association between the likelihood of releasing good-news forecasts and the magnitude of stock price increases. Additional evidence indicates that the good-news forecasts eventually conveyed by withholding firms after negative price shocks would likely have resulted in negative market reactions had they been released before the shocks. More generally, I provide evidence that managers withhold bad news and that exogenous stock price declines can induce its disclosure.
KeywordsVoluntary disclosure Management forecasts Stock-price contagion Bad-news withholding Restatements
JEL ClassificationM41 G14 G39
This paper is based on my dissertation, which was completed at Northwestern University, and won the 2008 AAA Financial Accounting and Reporting Section Best Dissertation Award. I am grateful to my dissertation committee: Thomas Lys (chairman), Ravi Jagannathan, Robert Magee, and Beverly Walther for their valuable comments. I also greatly appreciate suggestions from Russell Lundholm (the editor), an anonymous referee, Brian Cadman, Daniel Cohen, Aiyesha Dey, Ronald Dye, Yonca Ertimur, S.P. Kothari, Ram Ramanan, Sugata Roychowdhury, Thor Sletten, Jayanthi Sunder, Shyam Sunder, Joe Weber, Ross Watts, Rodrigo Verdi, Jerry Zimmerman, and seminar participants at Emory University, New York University, Northwestern University, MIT Sloan School of Management, University of California at Davis, University of Illinois at Urbana-Champaign, University of Michigan, University of Southern California, University of Rochester, University of Toronto, Tuck School of Business at Dartmouth, Washington University, Wharton School University of Pennsylvania, Yale School of Management. I thank Kellogg School of Management and MIT Sloan School for their financial support.
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