Theory posits that investors can rationally infer the implications of strategic nondisclosure for firm value, pressuring managers to disclose information voluntarily. This study documents that the lack of an earnings guidance predicts an abnormal return of −41 basis points around the subsequent quarterly earnings announcement, suggesting that investors do not fully incorporate the implications of nonguidance. Further analyses demonstrate that limitations in price efficiency, driven by investors' limited attention and shortselling constraints, explain the mispricing of nonguidance and are associated * The Wharton School, University of Pennsylvania † Anderson School of Management, University of California at Los Angeles.Accepted by Christian Leuz. We would like to express our special appreciation to Brett Trueman. We appreciate the helpful comments and suggestions of two anonymous referees, with less guidance issuance. Our results collectively highlight limited price efficiency as another friction when studying managers' strategic disclosure decisions.
JEL codes: G14; M41
This paper examines how credit rating levels affect municipal debt issuers' disclosure decisions. Using exogenous upgrades in credit rating levels caused by the recalibration of Moody's municipal ratings scale in 2010, we find that upgraded municipalities significantly reduce their disclosure of required continuing financial information, relative to unaffected municipalities. Consistent with a reduction in debtholders' demand for information driving these results, the reduction in disclosure is greater when municipal bonds are * Sloan School of Management, MIT; † The Wharton School, University of Pennsylvania.Accepted by Christian Leuz. We gratefully acknowledge helpful comments and suggestions from John Core, held by investors who relied more on disclosure ex ante. However, we also find that the reduction in disclosure does not manifest when issuers are monitored by underwriters with greater issuer-specific expertise and when issuers are subject to direct regulatory enforcement through the receipt of federal funding. Overall, our results suggest that higher credit rating levels lower investor demand for disclosure in the municipal market, and highlight the role of underwriters and direct regulatory enforcement in maintaining disclosure levels when investor demand is low. JEL codes: G24; G28; H74; M40; M41
This paper examines whether investor learning about profitability (i.e., the mean of earnings distribution) leads to persistence in disclosure decisions. A repeated single-period model shows that persistent investor beliefs about profitability lead to persistent disclosure decisions. Using earnings forecast data, I structurally estimate the model and perform several counterfactual analyses. I find that, when investors are assumed to know profitability, the persistence of management forecast decisions significantly declines by 17%–27%. About 24% of firms would have disclosed differently, resulting in 3.9% net change in the amount of information (i.e., posterior variance) provided to the capital market. Collectively, the results indicate the importance of learning profitability in understanding disclosure decisions and the capital market consequences of disclosures. This paper was accepted by Shiva Rajgopal, accounting.
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