Higher Levels of Disclosure Could Reduce Risk-taking and Diminish Long-term Value

Susan Albring, associate professor of accounting at Syracuse University‘s Martin J. Whitman School of Management, teamed with Xiaolu Xu ’13 Ph.D. (University of Massachusetts-Boston), to examine the relationship between the amount of voluntary disclosure and a firm’s level of risk-taking activity.

The study, “Management earnings forecasts, managerial incentives, and risk-taking,” shows that increased disclosure is correlated with lower levels of risk-taking activities within a firm. Without these risky decisions, long-term value could be lost.

The study attributes the lack of risk-taking activity to additional monitoring induced by disclosure. But when managers are awarded more incentive payment, they are more likely to make risky decisions, which attenuates the negative impact of disclosure.

Albring and Xiaolu based the study on prior research that an expanded disclosure policy improves firm information environment, lowers the cost of external funds, improves stock liquidity and improves firm growth. In the recent study, though, the researchers use more modern theory that higher levels of disclosure can prompt considerable costs to shareholders.

“It was a pleasure to team up with Xiaolu, a former Syracuse University Ph.D. student, to empirically test several implications of an analytical model (Hermalin and Weisbach, 2012) in the context of the voluntary disclosure decision to provide management earnings forecasts,” said Albring.