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Author: Bjorn Jorgensen Publisher: ISBN: Category : Languages : en Pages :
Book Description
We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multi-firm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex-post than a non-disclosing firm. Finally, we show that ex-ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.
Author: Bjorn Jorgensen Publisher: ISBN: Category : Languages : en Pages :
Book Description
We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multi-firm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex-post than a non-disclosing firm. Finally, we show that ex-ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.
Author: Bjorn Jorgensen Publisher: ISBN: Category : Languages : en Pages : 24
Book Description
Verrecchia (1983) investigates a manager's incentives for costly, discretionary disclosure of his information to risk-averse traders when the functional form of prices is exogenously specified. We extend Verrecchia (1983) by deriving the endogenously determined functional form of prices that would arise when all traders have constant risk tolerance. We show that these endogenously determined prices are inconsistent with the assumed prices in Verrecchia (1983) when the manager elects to not disclose. We derive the manager's disclosure strategy for our setting and extend the comparative static results in Verrecchia (1990) for risk-neutral traders to a setting where traders have constant risk tolerance and prices are endogenously derived. Further, in our setting, discretionary disclosure does not affect how traders price risk of different outcomes. Also, we offer a representation of risk-averse traders' prices using risk-adjusted distributions. Finally, these results provide implications for empirical-archival discretionary disclosure studies.
Author: Michael Kirschenheiter Publisher: ISBN: Category : Languages : en Pages : 48
Book Description
We develop the first general equilibrium exchange economy with risk-averse investors where firm managers can voluntarily make costly, discretionary disclosures regarding the liquidating value of the firm. This extends the discretionary disclosure setting of Verrecchia (1983) by relaxing the assumption of mean-variance pricing. Instead, we derive the equilibrium prices when risk-averse investors optimally allocate funds between a risk-free bond and risky stocks. We establish that these prices are equivalent to prices that would prevail if investors were risk neutral using risk-adjusted variables. The intuition for the required change in probability measure is analogous to the intuition for the adjustments required for option pricing. We show that in this setting, managers' optimal discretionary disclosure strategy is characterized by a disclosure threshold. We provide comparative static results for changing costs, signal variances, and asset variances. Further, we show that the structure of the prices and strategies derived is robust to the introduction of correlation in the future firm values.probability measure.
Author: Ahmed Alhadi Publisher: ISBN: Category : Languages : en Pages : 2
Book Description
This research investigates the association between discretionary disaggregation in mandatory risk disclosures, audit conservatism and the implied cost of capital (ICOE). Based on a sample of 141 financial firms from six GCC countries over the 2007-2011 period, we find that the ICOE is significantly negatively associated with discretionary disaggregation in mandatory market risk disclosures after controlling for firm-specific characteristics and country-specific institutional factors. Further, our interaction term between audit conservatism and firms' disaggregation in mandatory risk disclosures is negatively associated with the ICOE, particularly for small to medium size firms. These findings are robust to a series of sensitivity tests. Collectively, these results demonstrate that more discretionary disaggregation in risk disclosure provides more private information to investors.
Author: Thomas F. Cosimano Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
We examine a dynamic experimentation problem in which managers make a binary choice that influences the information available to investors. We model a manager's multi-period problem of discretionary disclosures of the persistent component of earnings, when disclosure of current earnings is mandatory. We establish that there exists a partial disclosure equilibrium characterized by a disclosure threshold, such that disclosures arise if and only if the information is above the threshold. This disclosure threshold is increasing in the mean and decreasing in the variance of earnings. Further, the threshold can either increase or decrease over time.
Author: Michael Dobler Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
This paper adopts and reviews discretionary disclosure and cheap talk models to analyze risk reporting incentives and their relation to regulation. Given its inherent discretion, risk reporting depends on disclosure incentives. To assess these incentives the analytical models consider risk reporting as an endogenous feature, thereby providing a benchmark to discuss regulatory attempts. Particularly, discretionary disclosure models refer to verified disclosure, e.g., on risk factors or risk management, whereas cheap talk models refer to unverified disclosure, like managerial forecasts on the impact of risk factors. This provides an analytically-based framework for discussion. Unlike prior literature, which focuses on disclosure cost, I argue that uncertainty of information endowment and issues of credible communication can explain restricted risk reporting observed empirically. Linking regulatory attempts to these restrictions implies that regulation may mitigate the incentives-driven restrictions to some extent, but can have adverse effects on risk reporting. I particularly discuss the link between effective risk monitoring and the precision of risk reporting; the ex post assessment and usefulness of managerial forecasts on impacts of risk factors; the claimed decreasing cost of capital by mandatory risk reporting; and the threat of self-fulfilling prophecies. While the discussion has implications for both specific risk reporting requirements and empirical research, overall results suggest that we should not overestimate the informativeness of risk reporting even in a regulated environment.
Author: Mark W. Nelson Publisher: ISBN: Category : Languages : en Pages :
Book Description
We report the results of two experiments that provide evidence that investors' risk judgments are affected by the numerical format used to describe outcomes within accounting disclosures. Consistent with prior research in psychology, investors assess higher risk in response to dollar-formatted disclosures than equivalent percentage-formatted disclosures. Consistent with the Persuasion Knowledge Model (Friestad and Wright 1994), this effect is moderated when investors have both (1) awareness that management has discretion over format and (2) sufficient cognitive capacity to consider its implications. Our results provide insight about the effects of current disclosure formats and suggest implications for managers who choose formats, investors who interpret formatted information, and regulators who consider whether to further prescribe the formats that are used in financial disclosures.
Author: Bjorn Jorgensen
Author: Bjorn Jorgensen
Author: Bjorn Jorgensen
Author: Michael Kirschenheiter
Author: Robert E. Verrecchia
Author: Ahmed Alhadi
Author: Roshayani Arshad
Author: Thomas F. Cosimano
Author: Michael Dobler
Author: Mark W. Nelson
Author: