AAA Spark Meeting of Regions

Does Political Uncertainty Restrain Informative Disclosure?

• In Event: Disclosure

Abstract

I examine the effect of political uncertainty on firms’ narrative disclosure during conference calls. Using Hassan et al. (2019) firm level political risk measure as a proxy for managers’ perception of political uncertainty, I find that political uncertainty is positively associated with a firm’s complex disclosure. To further understand the nature of this complexity, I follow Bushee et al. (2018) approach to decompose linguistic complexity into two latent components: “information” and “obfuscation”. I find that political uncertainty significantly increases the obfuscation component in narrative disclosure but has no impact on the information component. The results are consistent with the obfuscation hypothesis, suggesting that disclosure complexity during high political uncertainty periods is a managerial choice rather than an operational necessity. Additional analysis reveals that firms experience deterioration in the subsequent performance, suggesting that providing complex disclosure might be a tactic of impression management to mask poor future performance to mislead investors about firm fundamentals. In a cross-sectional analysis, I find that asset redeployability negate the positive association between political uncertainty and obfuscation disclosure, suggesting that firms with more redeployable assets can better manage uncertainties. Supporting the obfuscation hypothesis during high political uncertainty periods, I find that managers also tend to use other disclosure techniques including providing more ambiguous tone, scripted and shorter Q&A section of the calls, as well as other disclosure channels (10-Ks and 10-Qs). Moreover, I find that managers provide more forward-looking information in response to the increased demand for information by outsiders when political uncertainty is heightened. Overall, the findings suggest that managers alter firm disclosure structure to manage firm level political uncertainty.

Author

• Marwa Soliman, University of Ottawa