Acctg. Seminar: Jonathan Rogers (Univ. of Colorado)
That managers would choose to withhold firm-specific bad news is not only intuitive, but supported by theory, observed disclosure patterns, and survey responses. When signals are uncertain and may be revised in future periods, firms may choose to withhold the news to avoid presumably costly stock return volatility. This strategy, however, may not work when news contains a common industry component. When adverse news is industry wide, traders can infer signal arrival from the disclosure of any firm in the industry which increases capital market pressure to disclose. A cooperative equilibrium of non-disclosure requires tacit collusion. We document industry characteristics associated with industry-level financial reporting opacity. We also document intra-industry clustering of increases in the annual 10-K opacity, controlling for changes in fundamentals that we suggest are driven by disclosure choice consistent with tacit collusion. These opacity episodes are more likely in industries that tend to have large, correlated, negative shocks, industries with more significant equity incentives, and greater litigation risk. The opacity episodes are less likely in industries in which observable/public macro-economic data relevant to firm valuation is available. The results have implications for understanding when economic forces are sufficient to generate voluntary disclosure of industry-wide adverse news.