An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Mark Bagnoli
Purdue University

Susan G. Watts
Purdue University

Abstract: Using a Verrecchia-type model, we study the voluntary disclosure strategy of a manager with private information that the market uses to interpret financial information the firm is required to report. In equilibrium, her disclosure strategy enhances upward or mitigates downward revisions in the market’s estimate of firm value given the firm’s financial reports. Hence, whether she discloses large or small values of her private information and the probability of disclosure depend on the firm’s financial reports. This leads to testable implications regarding the probability of voluntary disclosure (e.g. firms with more surprising news provide more voluntary disclosures), and how earnings and revenue response coefficients depend on the manager’s voluntary disclosure strategy. Finally, we show that changes in mandatory disclosure regulations can reduce the probability of voluntary disclosure even though the manager’s private information is used to interpret the firm's mandatory disclosures.

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