Why Do Firms Voluntarily Preempt Mandatory Disclosures? The Role of Growth Prospects

• In Event: Analytical models
  In Paper Session: Analytical Models

Abstract

We demonstrate that the market response to the same total information when disclosed at different
points in time can vary significantly. If firms sometimes obtain private information about future
growth prospects along with past performance metrics, our analysis predicts circumstances under
which voluntary disclosures of a less favorable current performance can occur preemptively ahead
of mandatory disclosures as a way to communicate credibly strong future growth prospects.

Our analysis also establishes that market prices reflect information beyond the literal meaning
of firms’ mandatory disclosures because of firms’ past voluntary disclosure history. Markets reward
firms for voluntary disclosures of bad news that preempt mandatory disclosures and prices are
nonmonotonic in firms’ mandatory disclosures for firms that did not make preemptive voluntary
disclosures.

The frequency of disclosures is higher when information about growth prospects is soft than
when hard.

Authors

• Davide Cianciaruso, Northwestern University

• Sri S. Sridharan, Northwestern University