Weining Zhang

Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform

In 2005, the SEC enacted the Securities Offering Reform (Reform), which relaxes ‘gun jumping’ restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these pre-offering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi-exogenous changes in voluntary disclosure on information asymmetry, and thus a firm’s cost of capital. JEL Classification: G14; M41

Executive Pay-Performance-Sensitivity and Litigation

Although the standard principal-agent model predicts a negative relation between incentive strength (i.e., pay-performance-sensitivity or PPS) and firm risk, the empirical evidence is mixed (Prendergast, 2002). This study revisits this prediction. Using carefully selected litigation events to conduct a comparative static analysis, we show that firm risk, post lawsuit filing, increases by about 11% for our sample. We then document that the incremental PPS (measured by the correlation between executive’s annual compensation and shareholders’ wealth) drops after the company is sued, although the total value of compensation remains relatively unchanged. Once a lawsuit case is closed, we find that both firm risk and the incremental PPS revert back (risk goes down and incremental PPS goes up). Finally, we use the instrumental variable approach to test the relation between PPS level (measured by the sensitivity between executive’s wealth and shareholders’ wealth) and firm risk directly, and again find that, cross-sectionally, firm risk is negatively correlated with PPS level. Our evidences suggest that the standard principal-agent model prediction holds well and that executive’s incentives are indeed negatively related to firm risk.

Restrictions on Managers’ Outside Employment Opportunities and Asymmetric Disclosure of Bad versus Good News

This study examines the effect of restrictions on managers’ outside employment opportunities on voluntary corporate disclosure. The recognition of the Inevitable Disclosure Doctrine (IDD) by courts in the U.S. states in which the firms are headquartered place greater restrictions on their managers from joining or forming a rival company. We find that on average the IDD adoption increases the asymmetric withholding of bad news. We further show that the IDD adoption increases the asymmetric withholding of bad news relative to good news for firms whose managers are mainly concerned about losing their current job. However, an opposite effect is observed for firms whose managers are mainly interested in seeking promotion elsewhere. Furthermore, these effects are less pronounced for firms subject to greater monitoring of their disclosure policy. These results suggest that managers’ career concerns affect corporate disclosure policy and the effect varies with the type of career concerns.