When Commitment Hurts Credibility: An Experimental Investigation of a Disclosure Problem and a Potential Solution

• In Event: Voluntary Disclosure: Consequences

Abstract

Managers acknowledge the importance of commitment to disclosure—sticking to a disclosure precedent, once initiated. Empirically, however, managers suspend earnings forecasts, particularly when they fear that their forecasts may be inaccurate. Managers appear to trade off the reputation costs and benefits of commitment and accuracy and conclude that, in uncertain environments, they are better off staying silent. Using two experiments, I first show that investors not only fail to reward, but, in fact, penalize commitment to disclosure when managers’ forecast accuracy is low. I then provide evidence that this penalty arises largely from investors' failure to appreciate a manager's implicit commitment to disclosure because investors focus on forecast accuracy. A second experiment shows that this penalty is significantly mitigated if managers provide an explicit (written) commitment to disclosure. These results have important implications for managers who provide forecasts and for investors who use these forecasts to assess managers’ credibility.

Author

• Shankar Venkataraman, Georgia Institute of Technology