Are Higher Ability Managers Less Forthcoming with Strategic Disclosures?

• In Event: Financial Accounting and Reporting I

Abstract

I examine the relation between managerial ability and the disclosure of forward-looking strategic information prior to raising capital in seasoned equity offerings. Seasoned equity offerings are known for their high level of information asymmetry as evidenced by significant underpricing. Research suggests two channels which affect the level information asymmetry at the time of the offering. First, firms can reduce the level of information asymmetry by providing detailed plans for how the firm intends to maximize shareholder value with the proceeds from the offering (Leone et al. 2007). However, such information involves significant costs, such as those arising from the disclosure of proprietary information. Second, higher ability managers can credibly convey firm value at the offering date and hence, enjoy lower levels of information asymmetry (Chemmanur and Paeglis 2005). I argue that higher ability managers with lower levels of information asymmetry receive fewer benefits from providing disclosures about how the offering proceeds will be used and are less likely to incur the costs of disclosure. The evidence supports this hypothesis. My results stand in contrast with existing literature which documents a significantly positive association between managerial ability and other forms of voluntary disclosure (Trueman 1986; Baik et al. 2011).

Author

• Joshua Alan Lee, Washington University