Information Disclosure Strategy B. Lev (1992) Presented by: Ken Chong Robyn Fulkerson Allison Taylor Terry Woods

Introduction Voluntary Information Disclosure Limited planning Little attention Results of Disclosure Study 100 companies surveyed 55 companies with < 4 disclosures Only 16 companies with at least 1 disclosure

Impact of lack of Voluntary Disclosure Generally detrimental Significant and long-lasting Costly Capital market efficiency

Importance of Information Disclosure Provides benefits and incur costs the same as other corporate activities Warrants careful attention and long- term planning Information Disclosure Strategy

Empirical Findings Strategy announcements Acquisition announcements New product announcements Managerial earnings forecasts Warnings Dividend decrease Management’s discussion Analysts monitoring Equity carve outs Entry deterrence

Conclusions from Empirical Findings Voluntary disclosure significantly impacts capital markets stock price & trade volumes also on share volatility, liquidity, shareholder mix, confidence of suppliers/customers Efficient markets assure quick/proper reaction Deters competitors Use disclosure strategy to manage analyst’s expectations Despite strict rules much latitude to acceptable legal & GAAP standards

Who Benefits? Financial analysts Competitors Sophisticated investor Managers Stakeholders Impacts decisions & activities Information gap

Value Creation Affects outside perceptions Cost of capital/ input prices Terms of trade Affects information gap – Agency theory Depressed values Low investor certainty Evaluation costs Direct Value: narrows information gap Indirect Value: enhances corporate activities

Strategic Objectives Correcting misvaluations Enhancing liquidity Changing shareholder mix Deterring political/regulatory intervention Gaining competitive advantage

Cost of Disclosure Direct costs - processing/disseminating info Indirect costs - impact on a company’s decisions/activities supplier terms competitive position costs litigation costs Simultaneous and contradictory effects on various stakeholder groups - consider all stakeholders

Summary Voluntary disclosure can have significant impact in capital markets View as a corporate activity like production or marketing Especially important for new technology, small or politically sensitive industries Disclosure strategy an integral activity if a firm is to realize full value

Insights and Implications Strategy implications - disclosure strategy + integration Simultaneous and contradictory effects Disclosure vs. management inability Congruence with Agency/PA theories Implementation - GAAP/Voluntary Impact Conservatism Prospective Verifiable Commitment

Class Discussion Questions????