ABSTRACT We study optimal disclosure via two competing communication channels: hard information whose value has been verified, and soft disclosures such as forecasts, unaudited statements, press releases. show that certain may contain much disclosures, we establish that: (1) exclusive reliance on tends to convey bad news, (2) credibility is greater when unfavorable reported, (3) misreporting more likely issued jointly with information. also a report seemingly unbiased in expectation need not...

ABSTRACT We study a model of earnings management and provide predictions about the time-series properties quality reporting bias. estimate to empirically separate two components investor uncertainty: fundamental economic uncertainty, information asymmetry between manager investors due noise. find that (1) null hypothesis zero bias is rejected; (2) ratio variance noise introduced by process shocks is, on average, 45 percent; (3) plays significantly less prominent role in valuation,...

ABSTRACT This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal defer compensation. The manager's incentives vest over time an increasing rate, and compensation becomes very sensitive to short‐term performance. generates endogenous horizon problem whereby intensify manipulation in final years office. Contracts are designed encourage effort while minimizing adverse effects manipulation. We characterize mix short‐ long‐term...

We study disclosure dynamics when the firm value evolves stochastically over time. The presence of litigation risk, arising from failure to disclose unfavorable information, crowds out positive disclosures. Litigation risk mitigates firms' tendency use inefficient policies. From a policy perspective, we show that stricter legal environment may be an efficient way stimulate information transmission in capital markets, particularly nature is proprietary. model endogeneity dynamic setting and...

ABSTRACT We develop a model in which firm's manager can voluntarily disclose to privately informed investors. In equilibrium, the only discloses sufficiently favorable news. If is known be but disclosure costly, probability of increases with market liquidity and stock trades at discount relative expected cash flows. However, when investors are uncertain about whether informed, decrease trade premium Moreover, contrary common intuition, public information crowd more voluntary disclosure.

Using an earnings management model in which managers manipulate information when the firm’s control system fails, I introduce a measure of quality, based on notion integral precision, that has solid theoretical foundations. A trade‐off between frequency and magnitude overstatements is shown: are larger misreporting less likely. Overall, generates distribution announcements similar to its empirical analogue provides structural method identify likelihood by exploiting from moments reported earnings.

ABSTRACT We study optimal compensation contracts that (1) are designed to address a joint moral hazard and adverse selection problem (2) based on performance measures, which may be manipulated by the agent at cost. In model, manager is privately informed about his productivity prior being hired firm. order incentivize exert productive effort, firm designs contract reported earnings, can manager. Our model predicts convex in earnings; less sensitive earnings than it would absent manager's...

ABSTRACT We estimate a dynamic model of voluntary disclosure, using annual management forecasts earnings, that features manager with price motives and an uncertain, but persistent, information endowment. Our estimates imply that: (1) managers face disclosure frictions 35 percent the time; (2) conditional on being informed, withhold 17 (3) silent, possess 24 time. Managers' strategic withholding increase investors' uncertainty about earnings by 3 percent. find managers' reduce one-third in...

Abstract We study the design of monitoring in dynamic settings with moral hazard. An agent (e.g. a firm) benefits from reputation for quality, and principal regulator) can learn agent’s quality via costly inspections. Monitoring plays two roles: an incentive role, because outcomes inspections affect reputation, informational role directly values information. characterize optimal policy inducing full effort. When information is principal’s main concern, deterministic periodic reviews....

ABSTRACT We present a dynamic model of information acquisition and disclosure. The manager seeks to maximize future stock prices collects privately about the firm's fundamentals. Information increases arrival rate private information. can choose disclose his or withhold it in perpetuity. study impact on accumulation information, disclosure, initial investment.

ABSTRACT This paper studies the reliability of financial reporting when credibility manager, represented by his misreporting propensity, is unknown. We show that concerns affect time-series reported earnings, book values, and stock prices in ways seem consistent with empirical evidence. When investors are uncertain about process, earnings response coefficients, as well market-to-book values (MTB), random time-varying; relatively low MTB reflect poor reporting; s-shaped surprises insensitive...

We study firm's incentives to build and maintain reputation for quality, when quality is persistent can be certified at a cost. characterize all reputation-dependent MPEs. They vary in frequency of certification payoffs. Low payoffs arise equilibria because over-certification traps. contrast the MPEs with highest payoff equilibria. Industry standards help firms coordinate on such good The optimal allow high forever, once it reached first time. are either lenient or harsh, endowing multiple...

ABSTRACT We study the impact of asymmetric (i.e., conservative or aggressive) disclosure on a firm’s price in classic setting which its stock is traded by risk-averse investors and noise liquidity traders. show that accounting policies alter relative risk faced when they short versus long, causes market to differ for positive negative demand shocks. As result, conservatism raises firms’ valuations lowers their expected returns. further demonstrate relationship between informativeness returns...

We study a dynamic model of earnings quality and management in which firms take into account long- short-term considerations when reporting earnings. In addition to providing predictions about the time series properties bias, offers distinction between two components investor uncertainty: (i) fundamental economic uncertainty (ii) information asymmetry manager investors due or accounting distortions. also structurally estimate parameters empirically separate these uncertainty. This allows us...

We estimate a dynamic model of voluntary disclosure, using annual management forecasts earnings, that features manager with price motives and an uncertain but persistent information endowment. Our estimates imply that: (i) managers face disclosure frictions 35% the time; (ii) conditional on being informed, withhold 17% (iii) silent, possess 24% time. Managers’ strategic withholding increase investors’ uncertainty about earnings by 3%. find managers’ reduce one-third, in response to increased...

This paper studies the efficiency and distributive effects of three prominent accounting methods in auction settings when bidders’ incentives are linked to income. The purchase price method (PP) requires acquirer book acquisition at historical cost, thereby underestimating asset value by amount acquirer’s surplus transaction. exit (EV) is downward biased forces an loss on date acquisition. EV connects otherwise independent valuations inducing a reporting-based winner’s curse can even lead...

This paper studies the effect of performance feedback on tournament outcomes, when a possibly dishonest principal may manipulate agents' expectations to stimulate their effort. Under plausible circumstances, an increase in principal's propensity tell truth (i.e., integrity) induces mean preserving spread distribution effort and leads decrease expected profits welfare. More generally, I identify conditions under which lower integrity can improve effectiveness financial incentives inducing...