AAA Spark Meeting of Regions

Do Managers Voluntarily Disclose to Guide Themselves Through Policy Uncertainty? A Managerial Learning Perspective

• In Event: Political Motivations of Voluntary Disclosures

Abstract

We examine whether firms use voluntary disclosures to facilitate managerial learning from stock price regarding investment decisions in periods of elevated economic policy uncertainty (EPU). We find that capital expenditure (capex) forecasts are positively associated with EPU, particularly when potential investments are more irreversible and when managers are less informed. Consistent with managers learning from equity price reactions, we find that realized capital expenditures are significantly adjusted in the direction of market reactions to the issuance of capex forecasts, particularly during periods of elevated EPU. However, we also document decreases in stock liquidity in response to the issuance of capex forecasts and that the positive EPU-capex forecast relation is muted for firms with low liquidity, consistent with adverse selection costs constraining managers’ ability to elicit feedback from prices. Further analysis reveals that the effect of EPU on capex forecasts is distinct from an information asymmetry channel through which prior studies link voluntary disclosures to policy uncertainty. Overall, we document managerial learning as a novel voluntary disclosure incentive in response to heightened EPU.

Authors

• JAEWOO KIM, University of Oregon

• Zackery D. Fox, University of Oregon

• Bryce Schonberger, University of Colorado