A review of empirical disclosure literature
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A review of empirical disclosure literature
A REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature rd University368611IntroductionCorporate disclosure is critical for the functioning of an efficient capital market.’ Finns provide disclosure through regulated financial reports, including the financial statements, footnotes, management discussion and analysis, and other regulatory filings. In addit A review of empirical disclosure literature ion, some firms engage in voluntary conununication, such as management forecasts, analysts’ presentations and conference calls, press releases, internA review of empirical disclosure literature
et sites, and other corporate reports. Finally, there are disclosures about firms by information intermediaries, such as financial analysts, industry A REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature ize key research findings, and identify areas for future work. Section 2 examines the forces that give rise to demand for voluntary disclosure in a modern capital-market economy, and the institutions that increase the credibility of disclosures. We argue that demand for financial reporting and discl A review of empirical disclosure literature osure arises from information asymmetry and agency conflicts between managers and outside investors. The credibility of management disclosures is enhaA review of empirical disclosure literature
nced by auditors, standard setters and other capital market intermediaries.In section 3 we use the disclosure framework to identify important questionA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature ted accounting information, the role and effectiveness of intermediaries such as financial analysts, as well as factors1 Corporate disclosure can also be directed to stakeholders other than investors. However, there has been relatively little research on these types of voluntary' disclosures. Conseq A review of empirical disclosure literature uently, we focus in this paper on investor communication.Iunderlying firms' financial reporting and disclosure decisions, and their capital market conA review of empirical disclosure literature
sequences. However, a number of important questions have yet to be answered. 1'urthcr, as we discuss in section 4. significant changes in the economicA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature isclosure in C apital MarketsIn this section we examine the role of disclosure in modern capital markets. Information and incentive problems impede the efficient allocation of resources in a capital market economy. Disclosure and the institutions created to facilitate credible disclosure between man A review of empirical disclosure literature agers and investors play an important role in mitigating these problems. This section presents a framework for disclosure and section 3 discusses theA review of empirical disclosure literature
implications for research.A critical challenge for any economy is the optimal allocation of savings to investment opportunities. There are usually manA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature s ideas. While both savers and entrepreneurs would like to do business with each other, matching savings to business investment opportunities is complicated for at least two reasons. First, entrepreneurs typically have better information than savers about the value of business investment opportuniti A review of empirical disclosure literature es. Second.2entrepreneurs’ conununications with investors are not completely credible because investors know entrepreneurs have an incentive to inflatA review of empirical disclosure literature
e the value of their ideas.These information differences and conflicting incentives give rise to the “lemons" problem that can potentially lead to a bA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature “bad.” Both investors and entrepreneurs are rational and value investments conditional on their own information. If investors cannot distinguish between the two types of business ideas, entrepreneurs with “bad” ideas will try to claim that their ideas are as valuable as the “good" ideas. Realizing t A review of empirical disclosure literature his possibility, investors will value both good and bad ideas at an average level. Therefore, if the lemons problem is not fully resolved, the capitalA review of empirical disclosure literature
market will rationally undervalue some good ideas and overvalue some bad ideas relative to the information available to entrepreneurs.There are severA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature ivate information, thus eliminating the mis-valuation problem (see Kreps (1990). Chapters 17 and 18). Another potential solution to the information asymmetry problem is regulations that require managers to fully disclose their private information. Finally, the lemons problem can be resolved by effec A review of empirical disclosure literature tive information intermediaries, such as financial analysts and rating agencies, who engage in private information production to uncover managers' supA review of empirical disclosure literature
erior information.2 See Akerlofi 1970).3Figure 1 provides a schematic of the role of disclosure, and information and financial intermediaries in the wA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature . First, it can flow directly from savers to businesses. Examples include private equity financing and angel financing. A second and more typical way for capital to flow from savers to businesses is through financial intermediaries. The right side of the figure presents the flow of information from A review of empirical disclosure literature businesses to savers and intermediaries. Firms can communicate directly with investors through such media as financial reports and press releases. TheA review of empirical disclosure literature
y also communicate with financial intermediaries or through information intermediaries, such as financial analysts.A variety of economic and institutiA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature ion problem. Examples include the ability to write and enforce optimal contracts, proprietary costs that might make full disclosure costly for investors, regulatory imperfections, and potential incentive problems for intermediaries themselves. Research on corporate disclosure, therefore, focuses on A review of empirical disclosure literature cross-sectional variation in these factors and their economic consequences. ’3Research on Disclosure5 A similar approach is used by finance scholars tA review of empirical disclosure literature
o study corporate finance issues such as capital stiucture. dividends stock lepurchases and private equity financing (see. for example. Myers and MajlA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature iveness of auditors and information intermediaries, decisions by managers on disclosure, and the economic consequences of disclosure. Table 1 summarizes these questions. The remainder of this section discusses the findings and limitations of research on these questions, as well as opportunities for A review of empirical disclosure literature future research. We focus on empirical research; analytical research is covered by other papers in this issue (see Verrecchia (2001). Dye (2001). andA review of empirical disclosure literature
Lambert (2001)).3.1Regulation of Disclosure and Financial Reporting3.1.1Regulation of DisclosureMany economic models assume that demand for regulationA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business Harvar A review of empirical disclosure literature ch (1980). Watts and Zimmerman (1986). and Beaver (1998) note that accounting information can be viewed as a public good since existing stockholders implicitly pay for its production but cannot charge potential investors for their use of it. Prospective investors, therefore, free ride on information A review of empirical disclosure literature paid for by existing shareholders, leading to the potential underproduction of information in the economy.A second explanation for regulation, also dA review of empirical disclosure literature
iscussed by Leftwich (1980), Watts and Zimmerman (1986). and Beaver (1998). proposes that disclosure regulation is motivated by concerns other than maA REVIEW OF THE EMPIRICAL DISCLOSURE LITERATUREPrepared for the 2000 JAE ConferencePaul M. HealyandKrishna G. PalepuGraduate School of Business HarvarGọi ngay
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