Mandatory vs. voluntary ESG disclosure, efficiency, and real effects

In this study, we examine the equilibrium effects of ESG quality disclosure in both voluntary and mandatory regimes. A firm manager makes a private investment decision in an environmentally friendly or unfriendly project that affects future cash flows and the social externalities produced by the firm. We build from Shin (2003) and allow an informed manager to make potentially disparate disclosure decisions on multiple interdependent outcomes---future financial performance and ESG quality. We find that mandating ESG quality disclosure results in over-investment in the sustainable technology. That is, the manager often implements sustainable investment even though this is overall less preferred by shareholders. Moreover, a voluntary disclosure regime can be more efficient for investment than a mandatory regime, from the perspective of shareholders. The results also show that mandating ESG disclosure leads to a greater prevalence of sustainable investing. The results provide insights that can be relevant for public policy considerations regarding mandatory ESG disclosure as well as implications that can help to guide empirical research

Essay on Analyst Herding

This study investigates a dynamic model of analyst forecasting where the ordering of forecasts and analysts' information endowments are endogenously determined. Analysts are probabilistically informed, potentially biased, and can increase their informedness through information acquisition. I characterize the unique equilibrium which holds for general distributions. The results show that analysts with less bias, greater precision, or a greater likelihood of being informed forecast earlier. Moreover, the main results show (perhaps surprisingly) that analysts always choose to be imperfectly informed, even though information acquisition is costless. This arises from the incentive to induce more timely forecasting by the other analyst. Likewise, analysts choose a positive bias level in equilibrium in order to gain a strategic advantage in their forecast timing. I discuss a number of empirical implications and extend the model to allow analysts to learn over time

Voluntary disclosure with evolving news

We study a dynamic voluntary disclosure setting where the manager's information and the firm's value evolve over time. The manager is not limited in her disclosure opportunities, but disclosure is costly. The results show that the manager discloses even if this leads to a price decrease in the current period. The manager absorbs this price drop in order to increase her option value of withholding disclosure in the future. That is, by disclosing today, the manager can improve her continuation value. The results provide a number of novel empirical predictions regarding asset prices and disclosure patterns over time. These include, among others, that disclosures are negatively correlated in time, and stock return skewness is negatively correlated with lagged returns for firms with low uncertainty over their future profitability, in more competitive industries, and in industries with less informative public news.Submitted/Accepted versio

Sequential Reporting Bias

Firms with correlated fundamentals often issue reports sequentially, leading to information spillovers. The theoretical literature has investigated multi-firm reporting, but only when firms report simultaneously. We examine the implications of sequential reporting, where firms aim to maximize their market price and can manipulate their reports. Our model demonstrates that the introduction of sequentiality in the presence of information spillovers significantly alters the biasing behavior of firms and the resulting informational environment relative to simultaneous reporting. In particular, a lead firm always manipulates more when reports are issued sequentially. Interestingly, this occurs because follower firms, who benefit from information spillovers, place less weight on their own private information when issuing a report. This information loss leads the market to place greater weight on the leader’s report, which increases the incentive of the lead manager to manipulate her report. Moreover, the information loss from sequentiality leads to less efficient and less volatile prices. Additionally, we find that stronger correlation in firm fundamentals can amplify the lead firm's incentive for manipulation under sequentiality, in contrast to simultaneous reporting. We offer additional results regarding, for example, market response coefficients, and provide a number of empirical implications