Proprietary Costs and Disclosure Substitution: Theory and Empirical Evidence

Heinle, Mirko Stanislav; Samuels, Delphine; Taylor, Daniel J.

doi:10.2139/ssrn.3173664

Cited by 24 publications

(27 citation statements)

References 47 publications

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“…This tradeoff should be informed by judgments about the value added from additional complexity and the objectives of the paper. For example, in formulating our model, we could have endogenized the disclosure cost in a competitive industry entry and exit game (similar to Wagenhofer 1990); added noise to the manager's private information (similar to Verrecchia 1990); added an endogenous investment decision (similar to Heinle et al 2020); or assumed a normal rather than uniform distribution of firm value. Such features are not necessary to motivate a unimodal relation.…”

Section: Discussionmentioning

confidence: 99%

Voluntary disclosure when private information and disclosure costs are jointly determined

2021

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Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

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Section: Discussionmentioning

confidence: 99%

Voluntary disclosure when private information and disclosure costs are jointly determined

2021

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“…Managers tend to withhold the information of segments with relatively high abnormal segment profits when they face proprietary costs (Berger and Hann 2007). I use industry-size adjusted return on assets (I_ROA) as a measure of abnormal segment profits (Berger and Hann 2007;Heinle et al 2018). I measure I_ROA at the firm level and base the industry adjustment on the firm's primary Fama French 17 classification, and the size adjustment on the quintile of the firm within the industry.…”

Section: Methodsmentioning

confidence: 99%

“…First, they add to the literature on the factors that affect the corporate information environment (Hemmer and Labro 2008;Chen, Martin, Roychowdhury, Wang, and Billet 2018). My study identifies tax risk as an important factor that breaks down the link between IIQ and EIQ (Dichev et al 2013;Heinle et al 2018;Samuels 2020). The findings provide evidence that tax risk generates proprietary costs that limit managers' willingness to convey internal information to external market participants (Verrecchia 1983;Heinle et al 2018).…”

Section: Corroborate My Primary Findings Using the Adoption Of Finamentioning

confidence: 96%

“…My study identifies tax risk as an important factor that breaks down the link between IIQ and EIQ (Dichev et al 2013;Heinle et al 2018;Samuels 2020). The findings provide evidence that tax risk generates proprietary costs that limit managers' willingness to convey internal information to external market participants (Verrecchia 1983;Heinle et al 2018). 5 Second, the comprehensive approach of my study complements and extends prior literature that explores the relation between tax planning strategies and the information environment.…”

Section: Corroborate My Primary Findings Using the Adoption Of Finamentioning

confidence: 99%

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Does Tax Risk Attenuate the Positive Association between Internal and External Information Quality?

Oßwald¹

2020

Preprint

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This study examines whether tax risk attenuates the positive association between firms' internal information quality (IIQ) and external information quality (EIQ). Theoretically, higher IIQ allows managers to increase the quality of disclosures to external market participants, which improves EIQ. However, engaging in risky tax planning strategies discourages managers from disclosing information due to the risk of drawing attention from tax authorities (i.e., proprietary costs). I hypothesize and find that the association between IIQ and EIQ is fully attenuated for firms in the highest quintile of tax risk. A structural equation model and supplemental tests that account for business-related proprietary costs and uncertainty corroborate my findings. Overall, my results imply that firms with higher IIQ improve EIQ, on average. However, higher tax risk breaks down this link due to the proprietary costs of disclosing tax strategies to tax authorities.

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“…Because withholding private information from peers comes at the cost of increasing information asymmetry with investors, managers complement their concealments with additional "less proprietary" information so as not to harm price formation in the market (e.g., Barth et al, 2021, Glaeser, 2018, Glaeser and landsman, 2019, Noh et al, 2019. Heinle et al (2020) formalize this intuition by theoretically modeling the notion of "disclosure substitution." They highlight that mandatory and voluntary disclosures have separate and distinct disclosurespecific costs, such that a single uniform disclosure policy is suboptimal.…”

Section: Iia Information Disclosurementioning

confidence: 99%

Relative performance evaluation

Timmermans

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Proprietary Costs and Disclosure Substitution: Theory and Empirical Evidence

Cited by 24 publications

References 47 publications

Voluntary disclosure when private information and disclosure costs are jointly determined

Voluntary disclosure when private information and disclosure costs are jointly determined

Does Tax Risk Attenuate the Positive Association between Internal and External Information Quality?

Relative performance evaluation

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