When a manager is concerned with his firm's stock price, his disclosure decisions likely depend on what he expects the stock market reaction to his private information to be. This paper tests the hypothesis that the manager characterizes his private information relative to the firm's stock price and that changes in the stock price can affect the manager's incentives to disclose. In particular, I investigate whether managers tend to withhold information with negative value implications (bad news), releasing this information once a stock price decline transforms it into good news (i.e., relative to the lower stock price).
Identifying managers' incentives to disclose or withhold information is important because it contributes to our understanding of the information available to capital markets. Traditional capital market research has analyzed the impact of voluntary disclosure on stock prices, but not the reverse relationship. The objective of my paper is to fill this gap.
In order to identify whether changes in stock price induce managers to reconsider the disclosure of withheld information, I examine management forecasts following an exogenous price change. I find that managers whose firms suffer larger negative price shifts are more likely to disclose information associated with a positive market reaction (good news). This is consistent with the hypothesis that managers initially withhold bad news, but release the news in reaction to price declines (as the news is now good, relative to the lower stock price). Thus, I document the impact of stock price on discretionary disclosure and provide evidence consistent with managers withholding bad news from investors.
I derive my hypotheses from the "threshold" models of Dye (1985) and Verrecchia (1983). These models suggest that, in equilibrium, managers choose to reveal news that favorably affects stock price,and withhold information that adversely affects price. That is, each piece of new information that a manager receives implies a market value for the firm. There exists a threshold level of implied firm value below which a manager withholds information; the threshold corresponds exactly to the firm's stock price. In such a setting, some managers will possess undisclosed news, which they withheld because it was likely to lead to a stock price decline.
Download
The Effect of Stock Price on Discretionary Disclosure
