Disclosing Precision Strategically

• In Event: Research in Financial Accounting II

Abstract

Using the voluntary disclosure of the ratio of orders received to billed (the “book-to-bill” ratio), we document managers provide less (more) specific disclosure for negative (positive) firm outcomes. The qualitative descriptions are more negative in the absence of the disclosure and we find managers do not actually withhold bad news after considering these descriptions. We show managers strategically vary precision more when valuation incentives are higher and monitoring is lower, consistent with disclosure specificity responding to incentives. Our results are consistent with persuasion models in which managers use their control over disclosure to reduce its specificity for bad news, but inconsistent with managers withholding bad news.

Authors

• Chase Michael Potter, Indiana University

• Zachary R Kaplan, Washington University

• Kimball Chapman, Washington University in St. Louis