The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure

Zhou, Frank; Zhou, Yuqing

doi:10.1111/1475-679x.12296

Cited by 31 publications

(9 citation statements)

References 64 publications

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“…While Figure 1 suggests that this pattern holds in the data, we provide a more rigorous examination. To test for the non‐monotonicity, we follow and augment the design of Zhou and Zhou (2020), who consider a linear relation between guidance and performance. The first model we consider is the following:

G u i d e_{i, t} = α + β_{1} {ROA}_{i, t} + β_{2} {ROA}_{i, t}^{2} + γ^{'} Controls + ε_{i, t} .

…”

Section: Empirical Implicationsmentioning

confidence: 99%

“…The control variables include size, market‐to‐book ratio, leverage, stock returns, and stock return volatility. All control variables are lagged and defined according to Zhou and Zhou (2020). Column 1 includes the full sample of firms.…”

Section: Empirical Implicationsmentioning

confidence: 99%

“…While we have used return on assets as a measure for firm performance following the literature (e.g.,Zhou and Zhou, 2020), there are other alternative measures of firm performance or managerial ability (e.g.,Baik et al, 2011). We note that the results are qualitatively similar using instead the residual of a five-factor regression(Fama and French, 2015) or lagged ROA as our main performance proxy.22 We note that the smaller sample in this specification also leads to lower power in the test.C The RAND Corporation 2021.…”

mentioning

confidence: 99%

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No reliance on guidance: counter‐signaling in management forecasts

Aghamolla

Corona

Zheng

2021

The RAND J of Economics

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This study presents and provides an explanation for a novel stylized fact: both high-performing and troubled companies withhold issuing earnings guidance. We assume that the manager's ability affects the level of earnings and the accuracy of guidance, but issuing a forecast is costless for all manager types. Managers are thus able to signal their ability through accuracy in their forecasts. While high ability managers would seem to benefit the most from issuing guidance, in equilibrium we find that both high and low ability managers withhold issuing guidance, while intermediate types forecast. Hence, high ability managers counter-signal in equilibrium, which does not result in a subsequent "punishment" by the market. "Although we may discuss long term trends in our business, we do not plan to give earnings guidance in the traditional sense. […] We would prefer not to be asked to make such predictions, and if asked we will respectfully decline."-Larry Page and Sergey Brin, Google co-founders, 2004. 1

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G u i d e_{i, t} = α + β_{1} {ROA}_{i, t} + β_{2} {ROA}_{i, t}^{2} + γ^{'} Controls + ε_{i, t} .

…”

Section: Empirical Implicationsmentioning

confidence: 99%

Section: Empirical Implicationsmentioning

confidence: 99%

mentioning

confidence: 99%

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No reliance on guidance: counter‐signaling in management forecasts

Aghamolla

Corona

Zheng

2021

The RAND J of Economics

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“…First, prior empirical evidence demonstrates that the capital market systematically underreacts to nondisclosure. For example, Zhou and Zhou [2020] document that a firm's choice not to provide earnings guidance reliably predicts large price drops at the subsequent earnings release, suggesting that investors do not rationally infer information from silence. 9 Second, setting aside the possibility of investor irrationality, there are many information frictions that could prevent peer-harming disclosures from being fully anticipated and impounded into prices, within a rational expectations framework (à la Grossman and Stiglitz [1980]).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Relative Performance Evaluation and Strategic Peer‐Harming Disclosures

BLOOMFIELD,

HEINLE,

TIMMERMANS

2024

J of Accounting Research

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Many firms use relative stock performance to evaluate and incentivize their CEOs their. We document that such firms routinely disclose information that harms their peers' stock prices, and sometimes explicitly mention the harmed peers, by name, in these disclosures. Consistent with deliberate sabotage, peer‐harming disclosures appear to be aimed at peers whose stock price depressions are most likely to benefit the disclosing firms' CEOs. The pricing effect of these disclosures does not reverse, suggesting that the disclosures contain legitimate information regarding peers' prospects. In sum, our results suggest that relative performance evaluation in CEO pay motivates CEOs to internalize the externalities of their disclosures, and strategically disclose information that harms peers' stock prices, in order to improve their firms' relative standing within their peer group.

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“…However, managers are biased against providing unfavorable disclosures (Kothari et al 2009a, b). Yet, investors may view nondisclosure as an adverse signal and penalize nondisclosing firms (Milgrom 1981;Giglio and Shue 2014;Zhou and Zhou 2020). Hence, if managers assess climate risk as material to the firm but perceive the regulation regarding these disclosures as weakly enforced, then they will view disclosing material climate risk as essentially voluntary.…”

Section: Prediction Of Negative Associationmentioning

confidence: 99%

Climate-risk materiality and firm risk

2022

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Managers are required to disclose material climate risk in Form 10-K, but their decision whether or not to disclose is confounded by the lack of consensus on whether climate risk is material to the firms, as well as uncertainty about enforcement of disclosure regulations. Using the SASB Materiality Map™ to proxy for market expectations of climate risk materiality, we test whether the association between disclosing climate risk in 10-Ks and firm risk (proxied by cost of equity (COE)) varies with market expectations of climate risk materiality. Using S&P 500 firms’ decisions whether to disclose climate risk in Form 10-K for 2008 to 2016, we find that disclosing firms’ COE is 27 bps lower than nondisclosing firms’ COE. In industries where the market expects climate risk to be material, disclosing firms’ COE is 50 bps lower than nondisclosing firms’, while in industries where the market does not expect climate risk to be material, disclosing firms’ COE is 23 bps lower than nondisclosing firms’. Our results indicate that markets use expectations of climate risk materiality to infer the credibility of managers’ climate risk disclosure decisions. Our research contributes to policy-making on climate risk disclosures in regulatory filings and informs the debate around the costs and benefits of the SEC’s current proposal to enhance climate risk disclosures.

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The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure

Cited by 31 publications

References 64 publications

No reliance on guidance: counter‐signaling in management forecasts

No reliance on guidance: counter‐signaling in management forecasts

Relative Performance Evaluation and Strategic Peer‐Harming Disclosures

Climate-risk materiality and firm risk

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