Essays on Disclosure

The purpose of this paper is two-fold. First, I attempt a taxonomy of the extant accounting literature on disclosure: that is, a categorization of the various models of disclosure in the literature into well-integrated topics. With regard to the taxonomy, I suggest three broad categories of disclosure research in accounting. The first category, which I dub “association-based disclosure”, is work that studies the effect of exogenous disclosure on the cumulative change or disruption in investors’ individual actions, primarily through the behavior of asset equilibrium prices and trading volume. The second category, which I dub “discretionary-based disclosure”, is work that examines how managers and/or firms exercise discretion with regard to the disclosure of information about which they may have knowledge. The third category, which I dub “efficiency-based disclosure”, is work that discusses which disclosure arrangements are preferred in the absence of prior knowledge of the information, that is, preferred unconditionally. Then, in the final section of the paper, I recommend information asymmetry reduction as one potential starting point for a comprehensive theory of disclosure. That is, I recommend information asymmetry reduction as a vehicle to integrate the efficiency of disclosure choice, the incentives to disclose, and the endogeneity of the capital market process as it involves the interactions among individual and diverse investors

Voluntary Disclosure and the Cost of Capital

We investigate the association between voluntary disclosure and the risk-related discount investors apply to price. First, we study the association between (endogenous) disclosure choice and the discount in price induced by changes in the underlying model parameters: this informs empirical research that ignores endogeneity of disclosure by, for example, omitting the exogenous determinants of disclosure and the discount in price from the regressions employed. Second, we investigate the incremental effect of disclosure on the discount in price: this informs empirical research that controls for the direct effect of exogenous factors on the discount in price by, for example, including the exogenous variables in regression models employed. Finally, we examine the incremental effect of disclosure on the discount in price when changes in disclosure are not induced by changes in underlying exogenous parameters: this further informs empirical research that controls for the effect of exogenous factors on both the discount in price and disclosure, and focuses on the association between ‘unexplained disclosure’ and the discount

Discussion of an Economic Framework for Conservative Accounting and Bushman and Piotroski (2006)

We offer an economic framework for generating predictions about the demand for conservative accounting reports. We define conservatism as: More timely recognition of losses than gains as a result of the costs and benefits of reporting verifiable information by managers and/or firms being asymmetric. We also discuss Bushman and Piotroski\u27s interpretation of the speeds of “good news recognition” and “incremental bad news recognition” in “Basu-type” regressions as separate signals about accounting conservatism. Finally, we suggest avenues for future research that seeks to investigate the links between institutions and contracts, and between contracts and conservatis

Dividend Tax Capitalization and Liquidity

We provide a new explanation for cross-sectional variation in dividend tax capitalization. Our analysis is twofold. First, we conduct a theoretical analysis that shows that liquidity (illiquidity) mitigates (magnifies) the positive effect of dividend taxes on expected rates of return documented in prior literature. Second, we conduct an empirical analysis centered around the Jobs and Growth Tax Relief and Reconciliation Act of 2003, which reduced the difference between the maximum statutory dividend and capital gains tax rates, and find results consistent with our theory. We also provide results suggesting that institutional ownership’s mitigating effect on dividend tax capitalization documented in prior studies is attributable to stocks with greater institutional ownership being more liquid and not to the “marginal investor” being insensitive to dividend taxes

The Information Content of Specialist Pricing

This paper examines a process by which information-revealing prices are determined by considering the private incentives of a price-setting agent (whom we refer to as a specialist). The specialist has private information that may be (partially) revealed through his choice of a pricing rule. We define an equilibrium as a pricing rule and a response to that rule by a representative trader that maximizes the expected utilities of the specialist and the trader, conditional on each having rational expectations. By analyzing the existence and nature of this equilibrium, we attempt to develop further insights into the behavior of markets with incomplete information

Bias and the Commitment to Disclosure

This paper studies the propensity of firms to commit to disclose information that is subsequently biased, in the presence of other firms also issuing potentially biased information. An important aspect of such an analysis is the fact that firms can choose whether to disclose or withhold information. We show that allowing the number of disclosed reports to be endogenous introduces a countervailing force to some of the empirical predictions from the prior literature. For example, we find that as more firms issue reports or as the correlation across firms’ cash flows increases, the firm biases its report less. However, when we treat firms’ disclosure choices as endogenous, we show that the number of firms that commit to disclose decreases as the correlation across these cash flows increases, and this, in turn, offsets the direct effect of the correlation on bias

Delegated Trade and the Pricing of Public and Private Information

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced