Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144512
Authors: 
Gropp, Reint
Karapandza, Rasa
Opferkuch, Julian
Year of Publication: 
2016
Series/Report no.: 
IWH Discussion Papers 25/2016
Abstract: 
We consider an infinitely repeated game in which a privately informed, long-lived manager raises funds from short-lived investors in order to finance a project. The manager can signal project quality to investors by making a (possibly costly) forward-looking disclosure about her project's potential for success. We find that if the manager's disclosures are costly, she will never release forward-looking statements that do not convey information to external investors. Furthermore, managers of firms that are transparent and face significant disclosure-related costs will refrain from forward-looking disclosures. In contrast, managers of opaque and profitable firms will follow a policy of accurate disclosures. To test our findings empirically, we devise an index that captures the quantity of forward-looking disclosures in public firms' 10-K reports, and relate it to multiple firm characteristics. For opaque firms, our index is positively correlated with a firm's profitability and financing needs. For transparent firms, there is only a weak relation between our index and firm fundamentals. Furthermore, the overall level of forward-looking disclosures declined significantly between 2001 and 2009, possibly as a result of the 2002 Sarbanes-Oxley Act.
Subjects: 
repeated games
asymmetric information
firms
reputation
JEL: 
C73
D82
G30
L14
Document Type: 
Working Paper

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