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Voluntary Disclosure, Manipulation, and Real Effects




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    • Stanford University. Accepted by Haresh Sapra. We thank the editor, an anonymous referee, Jeremy Bertomeu, Madhav Rajan, Phil Stocken and seminar participants at the ESMT in Berlin, 2010 EAA meeting, Hebrew University, IDC Herzliya, London Business School, Ohio State University, Tel Aviv University, University of Alberta, University of Texas at Austin, the 2010 Utah Accounting Winter Conference, the Fifth Interdisciplinary Accounting Conference in Copenhagen, and the Fifth Annual Toronto Accounting Research Conference for helpful comments.


We study a model in which managers’ disclosure and investment decisions are both endogenous and managers can manipulate their voluntary reports through (suboptimal) investment, financing, or operating decisions. Managers are privately informed about the value of their firm and have incentives to voluntarily disclose information and manipulate their reports in order to obtain more favorable terms when issuing equity to finance a new profitable investment opportunity. The model shows that treating managers’ disclosure and investment decisions both as endogenous and allowing managers to manipulate their voluntary reports yields qualitatively different predictions from when the disclosure and investment decisions are considered separately and managers cannot engage in manipulation. The model predicts that managers’ disclosure strategy is sometimes characterized by two distinct nondisclosure intervals (contrary to traditional threshold equilibria of voluntary disclosure models) and that managers with intermediate news sometimes forego the new profitable investment opportunity. As such, the paper highlights the importance of considering the interdependencies between firms’ disclosure and investment decisions and provides new empirical predictions.

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