Talk Less, Learn More: Strategic Disclosure in Response to Managerial Learning from the Options Market

Abstract

We examine how options trading affects voluntary corporate disclosure, so that we can shed light on whether managers’ potential learning from the options market induces them to withhold disclosure. We find that options trading reduces the likelihood and frequency of management earnings forecasts, suggesting that firms that have active options trading on their stock make fewer voluntary disclosures. This finding is in accordance with the theoretical prediction that managers strategically reduce disclosure to avoid crowding out informed trading, which can give them informative feedback for their decision making. In support of the managerial learning channel, we document a real effect of reduced disclosure: When managers disclose less, options trading has a stronger positive effect on firm investment efficiency. The more pronounced effect of options trading on management earnings forecasts when the need for managerial learning is higher further supports the learning channel.

Behavioral Economics of Accounting: A Review of Archival Research on Individual Decision Makers*

“…For example, greater exposure to sunshine often leads to a better mood and more optimistic behavior (Cunningham 1979). Consistent with this prediction, Chen, Chen et al (2021) show that manager's issue more upwardly biased earnings forecasts when they have greater sunshine exposure. The impact of sunshine exposure on earnings forecast bias is stronger for managers who are less experienced and less capable, and CEOs who are more sensitive to sunshine‐induced mood experience adverse career outcomes in the form of shorter tenures and lower compensation.…”

“…Evidence on market timing and catering is also widely documented in accounting settings (see reviews in Libby and Emett 2014; Lee and So 2015;Blankespoor et al 2020). More recent accounting research also provides evidence that supports the managerial learning hypothesis (Zuo 2016;Wu 2019, 2020;Chen, Ng et al 2021;Goldstein et al 2021). 76.…”