Switching from Voluntary to Mandatory Disclosure: Do Managers View Them as Substitutes?

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Abstract

We examine the relation between firms’ voluntary guidance and mandatory 8K filings. We find a negative relation between changes in firms’ guidance and 8K filings, and that this relation strengthens following the 2004 expansion of mandatory 8K requirements, consistent with firms using the two disclosures as substitutes. We also verify that increases in 8Ks are associated with changes in how investors learn about value-relevant information, where 8Ks become a more informative disclosure channel and, conversely, guidance becomes a less informative channel. Finally, we show increases in 8Ks predict declines in firms’ subsequently announced profits, but this predictive link weakens after the 2004 regulation, consistent with firms changing the nature of information conveyed through 8Ks. Together, our findings suggest firms have become more reliant on 8Ks as a conduit for general types of information after the 2004 regulation, rather than primarily negative news, which reduces the incentive for some firms to issue guidance as a medium of disclosure.

Authors

• Suzie Noh, Massachusetts Institute of Technology

• Eric So, Massachusetts Institute of Technology

• Joseph P Weber, Massachusetts Institute of Technology