Disclosure, Equity Incentives, and Risk-Taking

• In Event: Financial Accounting and Reporting 2

Abstract

A prevailing view is that disclosure is beneficial to a firm’s outside investors because it allows them to better monitor managers. However, recent theory notes that it can also be costly to shareholders because it can induce managerial myopia wherein managers focus on short-term performance at the expense of forgoing risky projects which is beneficial for a firm’s long-term value. It is also argued that this detrimental effect can be assuaged by offering managers higher equity incentives. We take these predictions to data and find a negative association between disclosure and managerial risk-taking. Supportive of theory, we also find this negative relation is attenuated as managerial equity incentives increase. We find our results continue to hold even after taking into account the endogeneity of firm disclosure policy. Overall, our findings provide evidence that disclosure can be costly in that it can induce distortionary behavior in the form of reduced risk-taking.

Authors

• Susan M Albring, Syracuse University

• Inder K Khurana, University of Missouri-Columbia

• Raynolde Pereira, University of Missouri-Columbia

• Xiaolu Xu, University of Massachusetts-Boston