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Voluntary Disclosure, Moral Hazard, and Default Risk

Author

Listed:
  • Shiming Fu

    (School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China)

  • Giulio Trigilia

    (William E. Simon Graduate School of Business, University of Rochester, Rochester, New York 14627)

Abstract

We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm’s cash flows. Bad-news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case, whereas no disclosure leads to higher borrowing costs. For a given capital structure, disclosure reduces the firm’s default risk by lowering its pay-for-performance sensitivity. However, for a set of low-profitability firms, the anticipation of future disclosure of information by managers lowers both firm value and managerial rents at the financing stage because of a reduction in the firm’s initial liquidity. The model can reconcile the empirical evidence on the effects of providing earnings guidance, especially for loss firms.

Suggested Citation

  • Shiming Fu & Giulio Trigilia, 2024. "Voluntary Disclosure, Moral Hazard, and Default Risk," Management Science, INFORMS, vol. 70(6), pages 3447-3469, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3447-3469
    DOI: 10.1287/mnsc.2023.4860
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