The credibility consequences of managers' disclosure decisions
Abstract
The purpose of this dissertation is two-fold. I first provide a model of the
determinants of disclosure credibility. In my model, the four primary
determinants of a disclosure’s credibility are situational incentives at the time of
the disclosure, reactions of others, management’s credibility (i.e., management’s
competence and trustworthiness), and characteristics of the disclosure itself.
Developing a model of disclosure credibility is important, as anecdotal evidence
indicates that managers are concerned about the credibility of their disclosures.
Managers’ concerns are warranted; the academic literature suggests that firms
who are able to credibly communicate information have a lower cost-of-capital.
Given the importance of disclosure credibility to managers and the
significant role that management credibility plays in disclosure credibility, the
second part of my dissertation explores factors influencing management
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credibility. Specifically, I provide a theoretical framework and experimental
evidence on how managers’ disclosure decisions affect their credibility with
investors. Further, I examine whether investors’ judgements of management’s
credibility are based on different factors in the short- and longer-term. My
experimental results show that in the short-term, management disclosure
decisions regarding negative news have larger effects on perceived management
credibility than disclosure decisions regarding positive news. The results also
show that these short-term credibility effects do not persist over time. That is, in
the longer-term, perceived management credibility is primarily a function of the
valence of the news disclosed. Managers of firms who report positive earnings
news are rated as having higher credibility than managers of firms who report
negative earnings news, regardless of their disclosure decisions. Implications of
these results are discussed.
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