Why Managers with Low Forecast Precision Select High Disclosure Intensity: An Equilibrium Analysis

49 Pages Posted: 23 Feb 2012

See all articles by Miles B. Gietzmann

Miles B. Gietzmann

Bocconi University - Department of Accounting

Adam J. Ostaszewski

London School of Economics

Date Written: January 23, 2012

Abstract

Shin (2006) has argued that in order to understand the equilibrium patterns of corporate disclosure, it is necessary for researchers to work within an asset pricing framework in which corporate disclosures are endogenously determined. Echoing this sentiment, Larcker and Rusticus (2010) have argued that earlier empirical results claiming to find a negative relationship between disclosure and cost of capital may suffer fatally from endogeneity issues which, once addressed by a formal structural model, may reverse the sign of the relationship. The purpose of this paper is to introduce a general equilibrium model following the Black-Scholes paradigm with endogeneous disclosure in which firms select uniquely determined optimal probabilities of early equity-value discovery in a noisy environment. As firms may differ also in the uncertainty (precision) with which management can forecast the future, managers strategically increase the intensity of their (voluntary) disclosures to provide partial compensation for this perceived differential risk. A positive relationship then results between disclosure and the cost of capital.

Keywords: disclosure, cost of capital

JEL Classification: D82

Suggested Citation

Gietzmann, Miles B. and Ostaszewski, Adam J., Why Managers with Low Forecast Precision Select High Disclosure Intensity: An Equilibrium Analysis (January 23, 2012). Available at SSRN: https://ssrn.com/abstract=2009847 or http://dx.doi.org/10.2139/ssrn.2009847

Miles B. Gietzmann (Contact Author)

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Adam J. Ostaszewski

London School of Economics ( email )

Houghton Street
GB-London WC2A 2AE
United Kingdom

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