The Role of the Manager's Human Capital in Mandatory and Voluntary Disclosures

Chiao Da Management Reνlew Vol. 32 No. 1,2012

pp.J07-136

經理人人力資本在強制性揭露與自願

性揭露中所扮演的角色

The Role of the

Manager句 Human

Capital in Mandatory

and

Voluntary

Disclosures

陳玉麟 Yu-LinChen 中原大學會計系

Department of Accounting, Chung Yuan Christian University 盧佳琪 1 Chia-Chi Lu

國立中央大學會計學研究所暨財務金融學系

Graduate Institute of Accounting and Department ofFinance, National Cen仕alUniversity 蔡明宏 Min-HungTsay

國立中央大學財務金融學系

Department ofFinance, National Central University

摘要:本研究將強制性揭露對自願性揭露之影響納入 Nagar (1 999) 的模型中， 以分析自願性揭露均衡 。 本研究同時考量強制性揭露對於投資人資訊搜尋的 效果，以及強制性揭露提供經理人自願性揭露誘因的作用 。 本研究發現:相 較於 Nagar (1 999) 的模型 ， 經理人有更強的誘因將其私有資訊揭露給資本市 場 ， 故揭露代理問題在雙揭露制交互作用下較只考量自願性揭露制為不嚴 重 。 此外 ， 本研究的模型產生另一異於 Nagar 模型的揭露均衡:當投資人沒 有私有資訊時，自願性揭露之自發效呆與強制性揭露對於自願性揭露之誘發 效果的共同運作下，益不存在充分自願性揭露均衡 。 最後，自願性揭露之可 能性與強制性揭露的資訊品質、自願性揭露的資訊品質之間，均呈現正相關 。 因此，本研究對於盈餘揭露管制，以及建立良好會計系統以提供經理人公司 資產資訊兩方面，具有政策意涵 。 關鍵字:自願性揭露 ; 強制性揭露;資訊搜尋;績效評估 ; 經理人才能

I Corresponding author. Graduate Institute of Accounting and Dep訂tmentofFinance, National Central Universi旬，Jhongli City, Taiw妞，E-mail: Iunina@ncu.edu.tw

108 The Ro/e 01 the Manager:S Human Capita/ in Mandatory and 均 /untaryDisclosures

Abstract:This paper analyzes voluntary disclosure equilibria by modifying Nagar's (1999) model and including the effect of mandatory disclosures on his model. We consider mandatory disclosures' effect in triggering investors' information search and in motivating managers to make voluntary disclosures. Our extended model demonstrates that managers have more incentives to disclose private information to the capital market than Nagar's model indicates, which means the managerial disclosure agency problem is mitigated by the interaction between mandatory and voluntary disclosures. Moreover, our model yields additional disclosure equilibria that differ significantly 企om the equilibria in Nagar (1999): incorporating both self-effect and induced effect on the voluntary disclosure strategy rules out a full-disclosure equilibrium when the investors have no private information. Finally, the likelihood that managers will provide voluntary disclosures is positively related to the quality ofboth the mandatory and voluntary disclosures. Therefore, this study has policy implications in view of recent calls for regulating the disclosures in press releases related to earnings and setting up good accounting systems that provide managers with more appropriate measures of firm-specific assets

Keywords: 、'oluntary disclosure; Mandatory disclosure; Information search; Performance evaluation; Manager's talent

1. Introduction

In this paper we study how managers' concems about evaluations of their performances and financial-reporting regulations affect their voluntary disclosures.

Specifically, we analyze how a mandatory disclosure affects a firm's volwltary disclosures. First, we show that incorporating both self-effect and induced-effect on the voluntary disclosure 耐ategyrules out the full-disclosure equilibrium. We then show what incents a manager to disclose his or her private information to the public. Our model provides an eligible setting in which to examine managers' considerations ofhow to maximize their welfare under the two disclosure regimes

Chiao Da Management Review 均/.32No. /,20/2 109

in light of investors' uncertainty and diversity of opinions and the managers' concerns about 臼turecompensatlOn

The managerial-disc\osure agency problem is an impo此ant concern for investors, especially given disc\osure's key role in capital market allocations and corporate governance decisions (see, e.g.

, Bushman and Smith 2001; Verrecchia

2001). Managers with expertise have more information about their firms than the outside investors do, which condition is called information asymmetrl. The result of full disc\osure of this kind of private information to the public has been shown in the extant literature (Grossman and Hart 1980; Grossman 1981; Milgrom 1981; Wagenhofer 1990). However, firms are regulated to disc\ose some frnancial information in specific forms, inc\uding financial statements, footnotes, and other regulatory filings. Therefore, some later disc\osure models (Verrecchia 1983; Wagenhofer 1990; Sankar 1995; Suijs 1999) that have introduced the costs of disc\osure and the threat of market entry and shareholder litigation (Skirrner 1994; Kasznik and Lev 1995), and find that the partial disc\osure equilibrium occurs

Mandatory disc\osure exists in part to alleviate the agency problem, although

voluntary disc\osure may well create a path to a more broadly 仕ansparent and reliable performance valuation framework. Recent empirical studies have reasoned that the increasing usefulness of earnings announcements over time have increased the absolute or squared abnormal stock returns or abnormal 仕ading volume at earnings announcement dates (Francis et al. 2002; Landsman and Maydew 2002). Linsmeier et al. (2002) show that, after firrns disc\ose the information mandated by Financial Reporting Release No. 48 related to their exposures to interest, foreign cu訂閱cyexchange rates, and energy prices, trading volume sensitivity to changes in these underlying market rates and prices dec\ines,

2 Corporate disclosures have the potential to change firm value. Many studies in corporate

disclosures have suggested that voluntary disclosures can release rnanagers' private inforrnation

about the corporation and so reduce inforrnation asyrnmetry between the corporation 組dthe investors. Therefore, the arnount that rnanagers appropriate for thernselves (e.g., Kanoida et al. 2000; Sapra 2002; Shleifer and Wolfenzon 2002), firrns' cost of capit剖 (e.g.，Lornbardo and Pagano 2002; Larnbert, Leuz, and Verrecchia 2007; Hughes, Liu, and Liu 2007)， 個d 血E investors' uncertainty rnay all decline

110 The Role ollhe Manager s Human Capilal in Mandalory and 的lunlaryDisclosures

even after controlling for other factors associated with trading volume. This finding indicates that mandatory disc10sures provide useful information to mvestors.

However, there is Iittle theoretical literature on how changing the properties of the mandatory disc10sures may change other sources of information. Modeling the interdependence between the mandatory and voluntary disc10sures is an important issue since empirical research that investigates the econornic impact on changes in financial reporting typically omits the indirect effect of such changes on other sources of information, such as voluntary disc1osures. The perspective that mandatory fmancial reporting is the primary source of information to the capital market contributes to the lack of prior literature on the relationship between mandatory and voluntary disc1osures. From this viewpoint, a market's reaction to changes in the financial reporting itself is a considerably important issue, and the indirect effects of such changes on other sources of information are mostly second-order effects. On the other hand, Ball and Brown (1968) suggest that a mandatory fmancial-reporting regime based on completed transactions may be better characterized as a source of confirmatory information than as a primary source of timely (forward-looking) information. ln this alternative view, the indirect information effects 帥， by defmition, first叫der effects (Gigler and Hemmer 1998). Gigler and Hemmer (2001) investigate the link between mandatory and voluntary reportinl using the principal-agent model to examine how both liberal and conservative biases affect the usefulness of the mandatory financial reports in disciplining managers' voluntary disclosures. They show that incurring the costs of voluntary preemptive disc10sures is optimal only when the firm's accounting system is not too conservative. These important issues motivate this study to investigate the relationship between mandatory and discretionary disc10sures

This study is also motivated by Nagar (1999), who deals with the problem faced by prior disc10sure research, which exogenously assumed the firm to be a

J Most of the literature omits the managerial disclosure agency problem with respect to 也E

assumption of the preference-consistency between manager and investor (Hea1y and Pa1epu 2001)

Chiao Da Managemenl Reνlew 均/.32 No. 1,2012 l l l

black box with no agency problems. Nagar's approach conceming the role4 ofthe manager's human capital in determining voluntary disclosures is reasonable as

long as managers differ in terms of talent. Another assumption, that a disc10sure triggers information production by the market, is also reasonable since the manager's and inv臼to時， information sets tend to be significantly different in

terms of their structure and content (see, e.g. Kim 1 999i. Therefore, we take these assumptions as the basis of our paper. Moreover, we assume that investors know that the manager has private information and treat nondisc1osure as a

conscious choice rather than as an absence of private information, even though

they could not know whether the absence of disclosure is due to a manager with

talent or not.

However, Nagar (1999) assumes that there are no background uncertainties, which irnplies that the mandatory release of earnings has no effect on voluntary

disc1osure. We argue that this assumption ignores 6 the fact that mandatory disc10sure can increase the manager's uncertainty about the investors' response,

while this disclosure triggers acquisition of additional information by the investor. ln effect, the risk-averse manager faces a trade-off between a mandatory disclosure's inducing an

“

inevitable" uncertainty and a voluntary disc1osure's triggering an“avoidable" risk. The mandatory disc10sure induces the unce巾mty. Thus, the mandatory disc10sure provides a potential explanation for why some managers are more likely to have incentives to disclose voluntarily, especially when the “inevitable" uncertainty is bigger than the “avoidable" risk. We extend

4 Sankar and Subramanyam (2001) also focused on tbe role of the manager in discussing tbat tbe

manager uses reporting discretion to communicate private information, thereby increasing the inforrnation content of reported eamings. Gigler and Hemmer (2001) took the manager's position to depict the manager's argument. In additio日， empirical study has infe叮ed that stock-based incentives can reduce managerial reluctance to disclose private information. Nagar el a/. (2003) posited a solution to the disclosure agency problem using stock price-based

incentives and found that flrrns' disclosures are positively related to the proportion of CEO compensation that is a仔'ectedby stock price and the value of the shares held by the CEO 5 For example, Dye and Sridhar (2002) presented a model to show that capital market prices can

perforrn simultaneously their conventional role of assessing the future cash flow implications of

managers' anticipated actions and tbe role of directing the flrm's managers' 的tionstoward the higbest cash--generating activities; that 院 informatio口f10wsfrom fLrms to the capital markets as well as from capital markets to flrms

112 The Ro/e 0/ the Manager

s

Human Capila/ in Mandatory and Vo/untary Disclosures

Nagar's model by relaxing this ass山nption. We consider the role of mandatory

disc10sures in triggering information production by investors and in incenting managers to make voluntary disc1osures. Failure to consider the effects of mandatory disc10sures in this way will lead to incorrect inferences about what

motivates voluntary disc1osures.

Our primary objective is to identify how mandatory disc10sures induce

managers to make additional voluntary disc10sures and, based on our setti峙，

refine Nagar's (1999) voluntary disc10sure equilibria. We find that, in contrast to Nagar (1999), voluntary disc10sure will always exist since the manager has an

incentive to reduce the uncertainty from his or her mandatory disc1osure.

However, the manager will never make a full disc10sure on both the mandatory and voluntary disc1osures. Further, we find that the voluntary disc10sure increases with (1) a decrease in the noise of the mandatory disc10sure and (2) a decrease in the noise of the voluntary disc10sure under the comparative statics. Although it

uses a different 可pe of analysis, our model complements the findings of Gigler

and Hemmer (1998), which suggested that one role of mandatory disc10sures may

be that of a vehic1e that helps create an environment in which managers can

credibly communicate their more value-relevant voluntary disc1osures. Gigler and Hemmer refer to this role as the

“

confirmatory role" ofthe mandatory disc1osures,

similar to our

“

induced-effect. "

The remainder of the study proceeds as follows: Section 2 describes our

model and the major findings, Section 3 provides the comparative statistics,

Section 4 presents the implications and discussion, and Section 5 conc1udes

2. The Model

Our model is based on that of Nagar (1999), which inc1udes a risk-averse

decision-maker (a manager) and a risk-neutral capital market. The manager's

o句ectiveis to maxirnize his or her human capital7, rather than the firm value, so 7 Human capital is defined as the managers' talent. While investors can “自伊reout" manage悶，

Chiαo Da Management Review 均1.32No. 1,2012 1\3

an agency problem exists in our model. The true managerial talent and the 甘ue asset types are unknown to the manager and the investors. The beliefs of the manager about the physical asset types and managerial talent are denoted as a and t , respectively, which are random variables drawn from independent norrnal distributions. Earnings, the manager's gross salary, are produced by the manager 這 talent for management and the firrn-specific assets, e = a + t + w, where w is a zero-mean, norrnally distributed noise terrn representing exogenous shocks

The scenario is shown at two stages in one period. 1n the first stage, earnings are reported in the mandatory financial report. Based on this information, the manager computes the mean of the posterior be\ief about his talent as

九 =E[tl α +t + w]. Moreover, a public disclosure is assumed to contain tn凶ful inforrnation onll and to be observed by the capital market

Next

,

the investors observe the manager's mandatory disclosure

,

e and may mte巾ret the disclosure diffi巳rently from the manager. We model this difference in inte中retation as the pub\ic disclosure's triggering the market's acquisition of additional information, d = t + p , where p is a zero-mean, normally distributed stochastic term

Based on the mandatory disclosure, the investors update the mean of the manage內 talent to T'o=E[tla+t+w,t+p]. Under 伽 norrnali恥伽 T'o can be represented as a linear combination of two signals, To = 九 +B(d-T_o)， where:

investors have anything to do with the background information, so they view it as an unavoidable event. Instead, the manager who maximizes the value of his human capital has considerable f1exibility in terms of whe也 er and how the supplementary information (via disclosure) 的 presentedin order to affect the market's assessment of his buman capital 8 The same assumption applies to the models ofGrossman (1981), Milgrom (1981), Nagar (1999)

and Suijs (1999). One way to make disclosures credible to the public is by contracting with an auditor. Another mechanism is that which Evans III and Sridhar (2002) demonstrated, in which a firm's tradeoffs between reporting good news to reduce the cost of capital and bad news to minimize proprietary costs can induce the firm's managers to provide 甘uthfuldisclosures when the opposing effects balance each other. On the other hand, Stocken 's (2000) model presented the manager as almost always truthfully revealing his or her private information, provided that the manager is sufficiently patient, the accounting report is sufficiently useful for assessing the truthfulness of the manag前 'svo1untary disclosure, and the manager's disclosure performance is evaluated over a sufficiently long period

114 The Role 0/ the Manager:S Human Capital in Mandatory and Voluntary Disclosures B' 一 Cov(t，t+ pla + t + w) -Var(t+ p,a+t+ w) yar(tlα +t+w) Var(tla + t + w) + Va句

The risk-averse manager is uncertain about the capital market' resulting

assessment of his or her human capital, To, because of the unknown of d in advance. The uncertainty about To faced by the manager is represented by the

random variable

to

t 0 =丸 +k ，

where k is a normally distributed random variable with zero mean. Because

the mean of d is the manager's current assessment of the mean of t or 丸，

k has a zero mean

Lemma 1: The variance of k from the manager's perspective is:

[Var(tla + t + w)]2

Var(k) ._ . I

Var(tla + t + w) + Var(p)

Proof See Appendix

ln addition to information about current eamings, the manager privately

possesses relevant information about the firm's asset types, written as the signal z=α+ m, where m is a zero-mean, normally distributed noise term. Upon

getting this signal privatel弘 the manager computes the posterior mean of his

abil甸的7; = E[tla+t+ 叭 a+m]

ln the second stage, the manager has the option to disc10se Z to the market.

This private information may represent, for example, product quality or the

numbers of new products and patents; in fact, it can be given any meaning as long

as that meaning can be represented by a one-dimensional compact interval

Changes in the capital market's beliefs about a willlead to changes in investors'

be!iefs about t. In the same manner, for a simplified version, we assume that, if a

manager makes a voluntary disc1osure, he or she disc10ses this information

truthfully.

Chiao Da Management Reνiew Vol. 32 No. 1,2012 115

beliefs regarding the manager's talent. Because of the different information sets between the manager and the capital market, the manager's voluntary disc\osure will trigger another signal to the market participants about the manager's talent,

after which the investors will analyze the disc\osed information in the context of their information about the firm and its environment. For mathematical and comparative convenience9, we represent this difference as d = 1 + p, as in the mandatory case.

Upon the manager's voluntary disc\osure, the capital market will update its beliefs to 7; = E[/I a + 1 + 叭。 +m， l+p] . ln this ca試 the ma耐心 post-voluntary-disc\osure beliefs are similar to those after the mandatory disc\osure; T₂ can be written as 7; = ~ + B(d -~)， and the uncertainty about 7;

faced by the manager can be captured by 12 tz=有+B(d一頁)_,

1₂ = _~ +k_,

where k is a normally distributed random variable with zero mean_, and the uncertainty that the manager faces upon the voluntary disc\osure.

Lemma 2: The variance of k from the manager's perspective can be shown by

[Var(t_lα +I+w

_，

α+m)]2

Var(k') _{.. •} I

' 1

Var(tlσ+1 + w_,a+m)+ Var(p)

自-Var(tla+ t + w_,a + m)

where I I

Var(tla + t +叭 a+ m) + Var(p)

Proof See Appendix

Let the variance of a_, t_, w_, and m be A_, T_, W_, and M_, respectively. We assume that these random variables are independently distributed. Thus_, the

9 _{Of course}

, one can argue that there are di他rencesbetween the two disclosing regimes, but there

的noexact answer. For the pu巾的esof comparabi li旬，we assume that this difference is the same in both disclosure cases in the following context

116 The Role 0/ the Manager S Human Capital in Mandatory and Voluntary Disclosures

conditional variance of the manager's talent to Lemmas 1 and 2 appears in Lemma3.

Lemma 3: The conditional variance ofthe manager's talent is: 1_. . . , [AT+TW]

Var(tla + 1 + w) =一一一一一一 =G <>nA

(A + T + W) , allu

川、 [AMT+ WMT + AWT]

VarCtla+ 1 + w.a + m) =

、 (AM+ AT + TM + A W + MW) 日

Therefore, we get

Var(的

G

2

一

Var(k)

= 一主二一﹒

G+Var(p)' " g+Var(p) Proof See Appendix.

The two-stage scenario described thus far is shown in the following time line:

Figurel Time Line

Report the eaming

e=α +l+w

Manager makes a disclosure z = a + m or no disclosure rE o r e t e o-4 1 的 M EEt -ρ iv 叫“ Lhm clLD oa md EI ρ 尬，叫心 mM talent :Tl I talent 10 T2 the investors update the

mean ofthe manager's 能 m ae AUAU n rhu us ' 的汀 ωmv ceqa m 個 mm2 ρ iw 戶 LVl d hho ttt v.-O I ra e t n_a-' 的 M Ft 3t h 山 tc c--o oa md E eI au ， 叫 i M mM

Finally, in order to rule out the condition of collusion between the investors, we assume that firms operate in competitive managerial labor markets. The

expected marginal productivity of a manger is his or her talent. Following Nagar (1999), we assume that the manager's future wage is determined by the investor's updated evaluation of the manager's talent, w(H), and that it is strictly concave and satisfies weakly decreasing absolute risk aversion, i.e., thatw"(H)主O. The fact that risk-averse managers view the uncertainty about fu仙rewages as costly makes this assumption hold. Further, because the information sets of the manager and investors are different, the manager has subjective uncertainty about the

Chiao Da Management Review他 1.32 No. 1.2012 117

investors' assessment of his or her talent in the event of disclosure. Therefore, in

our model, when the firm-specific assets are productive but the manager is

untalented, the manager chooses nondisclosure to avoid adverse performance

evaluation. The manager who is talented but is afraid of disclosure-related

uncertainty also chooses nondisclosure.

2.

1. Solution of the Model

A voluntary disclosure strategy is in equilibrium if the manager has an

incentive to disclose or to withhold while taking into account the beliefs of the

capital market. This section first characterizes and then discusses the disclosure

equilibrium

Proposition 1. The induced effect

0/

mandatory disclosure on voluntary

disclosure: A voluntary disclosure strategy always exists because the risk-averse

manager views information as triggering an avoidable risk.

Proof See Appendix

The intuition behind this logic is as follows. When the mandatory disclosure

is released, the manager's uncertainty about the capital market's response to

disclosure arises as a result of the manager's incomplete knowledge of the

investors' information. The mandatory disclosure may lead to an equilibrium that

entails the manager's unce的am旬， to the detriment of the manager. Accordingly, after making rational conjectures regarding the related detriment, the manager

selects the optimal disclosure that will maximize his or her utility of fu仙rehuman

capital. When the manager is incented to make further voluntary disclosures to eliminate the uncertainty that he or she faces, we call this impact the

induced-effect; specifically, the precision of the market's prior beliefs about talent

or asset type, that is, A-1

and T \is low

This result is contrary to Nagar's result. Nagar assumed that the prospect that

a disclosure will trigger the market's acquisition of private information works as a

disincentive for the manager to disclose because the risk-averse manager cannot

predict with confidence the content of the information the market will acquire

118 The Ro/e 01 the Manager s Human Capita/ in Mandatory and Vo/untary Disclosures

she faces, taking both the mandatory and voluntary disc10sures into consideration. Therefore, the mandatory disclosure will also trigger an inevitable uncertain紗， and we interpret this uncertainty as the opportunity cost of the voluntary nondisc1osure, Var(k). Generally Accepted Accounting Principles (GAAP) allow managerial discretion, subject to certain restrictions, in determining financial reporting policies and procedures. This discretion makes earnings susceptible to manipulation; that is

,

there is a higher imposition on the manager

,

G > g , even though all discretionary disc10sure is 甘uthful. Therefore, the uncertainty from the mandatory disc10sure may be greater than the cost of the voluntary disc1osure, Var(k) . In other words, the mandatory disc10sure introduces an “inevitable" uncertainty that is due to the requirements of fmancial regulations, while the voluntary disc10sure triggers the investors to acquire further information and to use that information to reassess the manager's talent. The manager views the information provided in voluntary disc10sures as an

“

avoidable" risk because he or she disc10ses private information only ifit is more favorable than a certain threshold. Therefore, to facilitate the investor's evaluation,

the manager appears to voluntarily disclose private information when the manager concerns that the bottom line eaming number is less adequate as a performance evaluation metric.

In realistic settings, there exists that shareholders demand more disc1osures, and the manager wiU respond to this demand in order to reduce the opportunity cost of nondisc1osure. Therefore, the agency problem is mitigated by the interaction between the two types of disclosure

Proposition 2. The吃ffectof the quality of the investor

s

private information:

(1) The disc10sure threshold decreases (more disc10sure is likely) as the noise of the investor 's private information, Var(p), increases

(2) A partial voluntary disc10sure occurs if Var(p) > 2[Gg+ Var(p)(G+ g)].

(3) A full voluntary disc10sure strategy is never an equilibrium. Proof See Appendix

The investors may acquire some information 台om， for instance, other firms,

Chiao Da Managemenl Review 均 1.32 No.}, 2012 119

by his managerial responsibilities and limited human ability. Alternatively,

educated investors may use the c1ues from prior disclosures to seek further information and reduce the noise in conjectures about the manager's talent. The information of uninformed investors is chaotic, so the signal triggered by a disclosure is noisy and will not substantially affect their assessment of the manager.

Therefore, the shareholder composition and analysts' forecast may affect the noise in the capital markets' private infonnation. However, if managing a firm requires specialized knowledge, the information asymmetry is likely to be one-sided, with the capital market's relying on the management's interpretation in the disclosure. Ceteris paribus, the manager will consider Var(p) high in such a condition, and his or her uncertainty resulting 仕omthe disclosure will be reduced. After a mandatory disclosure, it is inevitable for the manager to face the uncertainty triggered by the disclosure. And, the more noise triggered by the capital market, the less uncertainty the manager faces, so the disclosure threshold will decrease both in mandatory and voluntary disclosures. However, it is the decrease of the mandatory disclosure's threshold that reduces the incentive for the voluntary disclosure. Therefore, there is a trade-off relationship between the self-effect of the voluntary disclosure and the induced effect of the mandatory disclosure, both of which are caused by the noise in the investors' private information.

Our result shows that it is impossible to exist the equilibrium of the full voluntary discIosure, and this finding is also con甘aryto Nagar's. In Nagar's view, in the absence of exogenously imposed proprietary costs, a full-discIosure strategy will not result in reassessment from the capital markets. To account for the induced effect from the mandatory disclosure, we think it is possible to excIude the full voluntary discIosure equilibrium because of the induced effect of the mandatory disclosure, even though there are no proprietary costs in discIosure

A distinguishing feature of the aforementioned analysis is that the interaction between mandatory and voluntary disclosure removes the possibility of a full voluntary discIosure. Prompted by P間 's (2002) concept, this paper considers a hypothetical benchmark: In our scenario the manager's private information is

120 The Ro/e 01 the蜘nager

s

Human Capita/ in Mandatoη and 均 /untaryDisc/osures

public\y known, there is no mandatory disc\osure but only voluntary disc\osure, and the capital markets have no private knowledge, Var(p) =∞. In this circumstance, the capital market will value the manager's compensation via his or her intrinsic talent, so the manager will face no uncertainty about the disc\osure There is no efficiency loss because the allocation of the resources fully incorporates the information content of the signal. Pareto improvement occurs in welfare since the resource allocation is more accommodating to the manager's talent.

Such an efficient outcome is not achievable when voluntary and mandatory disc\osures interact, so full voluntary disc\osure is driven out. The mandatory disc\osure discourages the voluntary disc\osure in this scenario, while it encourages the further disc\osure in Proposition 1. This divergence can be explained by the enhanced induced effect of the mandatory disc\osure on the voluntary disc\osure's only occurring in intervals when the capital market has no private knowledge. From this standpoint, although regulators generally allow the existence of managerial discretions, our model shows that it will deter the full

10 voluntary disc\osure'v.

3. Comparative Statics

This section characterizes a comparative statics analysis of the equiliblium disc10sure policy with respect to certain information-related parameters. The implications of policy are then outlined.

Proposition 3. The effect

01

the quality

01

the voluntary disclosure:

The disc10sure threshold decreases (more disc10sure is likely) as the precision ofthe manager's private information,M , increases.

Proof See Appendix

10 As Sankar 個d Subramanyam (2001) mentioned, that earnings management results in the

limited informational value of accounting numbers is almost unanimously accepted in the informativeness is widespread among accounting researchers, it is not unanimous. However,

Chiao Da Managemenl Review 均1.32 No. 1, 2012 121

A result that can be interpreted as similar to Proposition 3 is found in Nagar

(1999), except we add the induced effect of the mandatory disclosure to the

voluntary disclosure. Intuitively, the more precisely the asset type is known a

priori, the less press叮e will be exerted on the manager to reveal what he or she

knows privately. When the signal becomes more informative, investors, who are

aware that the manager faces little uncertainty upon disclosing, increase the

penalties for nondisclosure. (Recall that the signal is withheld only when it is unfavorable.) Altematively, when the manager has an exact idea of his type since

he has more precision about assets, he or she will be likely to present his or her

views to the investors. Hence, the likelihood of disclosure increases as the quality ofthe manager's private information improves.

Proposition 4. The吃ffectofthe quality ofthe mandatory disclosure

The disclosure threshold decreases (more disclosure is likely) as the precision of the eamings information, W , increases

Proof See Appendix.

Intuitively, if the noise of the eaming information decreases, the manager has a

more precise idea of his type and the asset's type. 1n this case, the manager faces

less uncertainty upon making these two disclosur白， so the threshold of the

disclosure decreases. Further

,

the manager is more likely to disclose in order to reduce the uncertainty from the mandatory disclosure when the precision of the market's prior belief about his or her talent or asset the type, A-_' and T斗， islow.

Therefore, as the quality of the eamings information improves, a constant disclosure cost tends to reduce the nondisclosure set

The comparative statics show that voluntary disclosure increases with (1) a

decrease in the noise of the mandatory disclosure and (2) a decrease in the noise of the voluntary disclosure. Managers often announce their sources of information along with the type of information, and this contemporaneous disclosure may be useful in identifying the sources of uncertainty. 1n this paper, we assume that the indirect effects between voluntary and mandatory disclosures will strengthen the direct effects in one of exogenous disclosures

122 The Ro/e 01 the Manager's Human Capital in Mandatory and Vo/untary Disclosures

4. Implications and Discussion

This study has policy implications in view of recent calls for regulating disclosures in press releases about earnings. When the goal that the regulator wants to achieve is to boost tr個sparency in the inforrnation environment, the results of our Proposition 1 suggest that financial regulations should focus on imposing mandatory reporting in light of its total effect on a firrn's disclosures (both mandatory and voluntary). Regulatory attempts to enhance mandatory disclosures in annual reports spur additional voluntary disclosures that facilitate the investors' ability to interpret the mandatory disclosure because the risk-averse manager cannot predict how the minimum inforrnation provided in mandatory disclosures will be interpreted to assess the fmn's future prospects and the manager's talent.

In addition, according to our Proposition 2, although lower-quality information held by investors tends to decrease the threshold level of the voluntary disclosure, the induced effect of the mandatory disclosure on the voluntary disclosure may have the opposite effect. As a result of these two countervailing effi凹的， the manager's optimal voluntary disclosure policy is an interval forrn. In particular, a full voluntary disclosure strategy can be completely ruled out when the investors have no private information. Prior literature11 has shown that mandatory and voluntary disclosures are substitutes by assurning that an increase in mandatory disclosure is interpreted as either a decrease in the market's prior variance of the firm's liquidation value or as the release of an additional signal correlated with the fmn's liquidation value. Rather than focusing on whether the manager knows a signal (i.e., information in voluntary disclosures) correlated with firm value, we provide another reason why mandatory disclosures deter full voluntary disclosures. In the circurnstance in which the manager face a large majority of small investors who lack access to proprietary fmn- and

indus吋﹒ specific information, the lower subjective uncertainty he or she faces after a mandatory disclosure leads to a decrease in the probability of voluntary

Chiao Da Management Review Vol. 32 No. 1.2012 123

disc10sure (i.e., the negative induced effect of the mandatory disc10sure on the

voluntary disc1osure).

Finally, the analyses of our Propositions 3 and 4 show that the likelihood of a voluntary disc1osure's being provided by the manager is positively related to the

quality of mandatory disc10sures and the quality of voluntary disc1osures.

Therefore, policymakers should set up a good accounting system that provides the

manager with the best measures of firm四specific assets. In this scenario, the manager who has an exact idea of hislher type is able to improve the quality of

both mandatory and voluntary disc1osures. Because of the positive induced

effect of the mandatory disc10sure on the voluntary disc1osure, the positive relationship between the likelihood of the voluntary disc10sure and the quality of

mandatory/ voluntary disc10sures will be stronger when there are both mandatory

and voluntary disc10sures than when there are only voluntary disc1osures.

5. Conclusion

In this paper, we are interested in the disc10sure effect on the voluntary

disc10sure which is succeeding a mandatory disc1osure. We modi令 Nagar's(1999)

model to give an insight of the relation between the mandatory disc10sure and the

voluntary disc1osure. We argue that examinations of voluntary disc10sure

incentives must consider the role that the mandatory disclosures play in shaping

firms' voluntary disc1osure. Our extended model demonstrates that managers have

more incentives to disc10se private information to the capital market than Nagar's

model indicates, which means the managerial disc10sure agency problem is

mitigated by the interaction between mandatory and voluntary disc1osures.

Moreover, our model yields additional disc10sure equilibria that di位r

significantly from the equilibria in Nagar (1999): incorporating both self-effect and induced effect on the voluntary disc10sure strategy rules out a full-disc1osure

equilibrium when the investors have no private information. Finally

,

the

likelihood that managers will provide voluntary disc10sures is positively related to the quality of both the mandatory and voluntary disc1osures. Therefore, this study has policy implications in view of recent calls for regulating the disc10sures in

124 The Ro/e 01 the Manager

s

Human Capita/ in Mandatory and 均/untaryDisc/osures

press releases related to eamings and setting up good accounting systems that provide managers with more appropriate measures offmn-specific assets

When the goal that the regulator wants to achieve is to boost transparency in the information environment, financial regulations can design a mechanism that will increase the likelihood of voluntary disclosure and the quality of information.

For ex缸nple，because of mandatory disclosures' total effect on a firm's disclosure strategy (mandatory and voluntary)

,

financial regulations should focus on imposing mandatory reporting. In addition, policymakers should set up a good accounting system that provides the manager with appropriate measures of fmn-specific asse紹， leading to a high quality in both mandatory and voluntary disclosures. Because of the positive induced effect of the mandatory disclosure on the voluntary disclosure, the positive relationship between the likelihood of the voluntary disclosure and the quality of mandatory/ voluntary disclosures will be stronger when there are both mandatory and voluntary disclosures, rather than only voluntary disclosures. Accordingly, a finn' strategy for providing voluntary disclosures cannot be studied without taking into account the impact of its mandatory disclosures

6.

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Sapra, H. (2002),“Do Mandatory Hedge Disc\osures Discourage or Encourage Excessive Speculation?" Journal of Accounting Research, 40(3), 933-964 Shleifer, A. and Wolfenzon, D. (2002),“Investor Protection and Equity Markets,"

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128 The Ro/e 01 the Manager

s

Human Capita/ in Mandatory and Vo/untary Disc/osures

APPENDIX

Proof of Lemma 1. Var(k') = B2[Var(dla + t + 叫] yar(tla+t+w') ".." ' 1 , J"[Var(t+ pla+t+w)] 均r(tla+ t + w) + Var(pf L [Var(tla + t + w)f 均r(tla+ t + w) + Var(p) Proof of Lemma 2. Var(k) = B2[Var(dlα +t+w，α +m)] y'arUla + t + w.a + m

1 、'---，-，]" [Var(t + pla + t + w, a + m)]

(tla + t + w,a + m) + Var(pf L

[Va均la+t+w， a+m)]2

Var(tla+t + w,a +m) + Var(p)

P陶ofofLemma3:

The deduction of this proof is the same for both disc10sure cases. We first prove the mandatory case. For notational convenience, we mak:e some variable transformation.

Let X = t, and Y = t + b, because t and b are independent normal distribution, the joint density function of (t，的 is f(t,b), where

戶 d

l 哥哥

f(t， b) =了一一 ~Ob

The Joint density function of 令，y) is g(X， η

以η=只X;Y一均II~I ，

wl帥 IIJII re啦'es叫

.. IIJII=1

Chiao Da Management Review 均/.32No. J, 20/2 x' (Y-X)' =一一二一-e σe 叫2 21[(J， σb ( [1(4+4)f-MEf+fq2J 1 =一一呻{ 9 9 2;間q， 2qL q,L

[X-Y(

_予了

_W

_v2 =---e>昕一

:

b

_J 門 }叫{一 ， }， 2trCT,(J_b 劫后 2(cr_bL +σ/r'

、

σ?σ? where σ _，ι ， σ ，- +σJ

Theretì帥_{, f(~} is a nonnal distribution 咐wi訛恤t血h va訂aria

σ 吋.2 σ 吋'，2_+σ吋;， I ••

d d.

Var(tlt+b)= _~' -/}一 l _吋+吋 129

Let b = a + w_,if a ' t and w are independently nonnally distributed_,

r.I_, , ,...l_ Var(t)[均巾)+ Var(

叫]

一

(AT+TW) _ r ' Varl _{L T} tl α +t+w _{' J} 1一 一一一一一一一一 =G

Var(t)+[Var(a)+Var(w)] (A+T+W) -Similarly_, in voluntary case_, one can show that:

.r.1

_、

(AMT+ WMT ₊ A WT) Varft刊la + t ₊ w.a ₊ ml =

(AM+AT+TM+AW+MW) 12

Proof of Proposition 1

This proof is divided into two parts. The first part follows the proof technique in Nagar (1999) in order to show the unique threshold point_, and the second part shows the induced etTect of the mandatory disclosure on the voluntary disclosure in order to detennine whether a voluntary disclosure strategy always eXlsts

12

的 o The Role 0/ the Manager

s

Human Capital in Mandatory and Voluntary Disclosures

The manager has to disc10se e but has the choice between disc10sing and

not disc10sing Z. The realized earnings, R , are public1y announced as

R = a + t + w, and the manager gets the private information about the asset type,

Z = a + m. Then R - Z = t + w - m. There is one unique threshold H such that

the manager disc10ses Z if and only if R - Z > H. The utility of the voluntary

disc10sure is w(E[中+w - m > H]). At the threshold H

,

the manager is

indifferent between disclosing and not disc1osing. If the manager chooses the

nondisc1osure s甘ategy，the investors rationally anticipate the manager's type to be

耳tlt+w-m < H] , and the u叫叫叫ti仙i\山\i句 of nond吋di誌s邱叫c1枷l

w

叫(恬何E耳[叫4中t+w 一→mη1< H]) . Moreover, a disc10sure t時gers an additional si 伊al to the investors, namely, d = t + P .

Since the manager does not know the content of d, his or her expected

u

叫凶叫ti“il山lit句圳yof 伽 volun江m昀1

Let

T..

=E[tlt+w-m=H]. The prop的es of 伽 normaldistribution imply that:

E[tlt+w-m= 的 + p]]= 咒 +B(d 一頁)=月 +k ，

where k has a zero mean because the mean of d is the current mean of t

from the manager's perspective

,

namely

, T..

In the voluntary disc10sure case, the manager

makes E

w(T..

+ k) =

w(T.. -

RP(同))， where w is a concave function and RP(.)

的 therisk premium that results from the lottery k. Because w is assumed to

satisfy weakly decreasing abso1ute risk aversion

,

the higher the

T..,

the less costly

the lottery k is to the manager. In short, the risk premium of the lottery k is

decreasing in

T..:

dRP(

T..)

,-1\ 已 dRP(H)，-仇

一…一一…

d

T..

dH

Since w(.) is strictly concave and RP(.) is strictly positive, they imply

that RP(t + w- m = H) is weakly monotonically decreasing in H . Verrecchia

(1983) proved 曲的 E[tlt+w-m=H]-E[中+w -m < H] is monotonically

Chiao Da Management Reνiew Vol. 32 No. 1, 2012 131

infinity as H goes from negative infinity to positive infini吟， we can show that there is one and only one threshold point H where

E[tlt+ w-m = H]-E[tlt+ w- m < H] = RP(t+ w-m = 的

In the second part of the proof, we present the induced effect of the

man也torydisc10sure on the voluntary disc1osure. We first determine whether the manager has a choice in terms of whether to disc1ose. His or her expected utility that is due to the mandatory disc10sure would

beE

_d

叫E[tla+t+ 叭 t+p])= 丸 +B'(d一九)=丸+去，where k' has a zero mean. In

other words, if his or her option is to disc10se in the event of the mandatory

disc10s咐，也emanager makes Ew(To + 的=w(丸-RP(I'o)).

However, the manager must abide by the results ofthe mandatory disc1osure,

so it is expensive for a risk-averse manager to endure the uncertainty, k. When the manager decides whether to make the voluntary disc10su時， the decision implicitly covers the changes in uncertainty that will result from the further disc1osure. A selιinterested manager may try to abate the uncertainty; one of the best tools is to use the discretionary disc10sure to achieve this objective if the

variance of k is smaller than that of k

From Lemma 3, we can get the uncertainty faced by the manager from the mandatory and voluntary disclosures.

.: Var(k') -Var(k) G2 g2 G+Var(p) g+Var(p) (G - g)[Gg + Var(p)(G + g)] [G + Var(p)][g + Var(p)] \.G- g (AT)2 > O.

(A+T+W)(AM +AT+TM +AW +MW)

:. Var(k') -Var(k)>0

Q.E.D

This is how we show the induced effect of the mandatory disc10sure on the voluntary disclosure. Then, there is the unique threshold and a voluntary

132 The Ro/e 01 the Manager

s

Human Capita/ in Mandatory and 均/untaryDisc/osures

disc10sure equilibrium given above.

Proof of Proposition 2 (1)

枷(的

G

2 G+Var(p)

hr(k)=-iL一

g+Var(p) (2) and (3) --+ --+ 。均r(k') G δ Var(p) [G+ 均r(p)]2 、v aVar(k) g aVar(p) [g+ 均r(p)f 、 v Q.E.D. 1n our view, a full voluntary disc1osure-equilibrium with respect to Var(p) is the condition in which the direct effect of the voluntary disc10sure matches the induced effect.

F叮st，we show the direct e缸ectin the case when the investors have no private

knowledge: Var(p) = ∞

Var(p) =∞ implies Var(k)

=

0 and Var阱')

=

0, and voluntary disc10sure yields

Ek叫E[tlt+ w-m

=

H]+ k) = 叫耳tlt+ w - m

=

H])

Because of the rational expectations, nondisc1osure generat芯S w(E[tlt + w- m < H]). Similarly, there is a 臼削Iiιlft

voluntary disc10sure because 叫E[tlt+ w-m = H]) >叫E[tlt+ w - m < H]) for all finite H. However, the induced effect of the mandatory disc10sure will interfere with the direct effect.

一 (G- g)[Gg + Var(p)(G + g)] .. Var(k') -Var(k) 一 [G+ Var(p)][g + Var(p)] .司 Var(k') - Var(k)] δ Var(p) (G - g)(G + g)[G+ Var(p)][g + Var(p)] {[G + Var(p)][g+ Var(p)]}2

Chiao Da Management Reνiew Vol. 32 No. 1.2012

(G - g)[Gg + Var(p)(G + g)][G+ Var(p) + g + Var(p)]

([G + Var(p)][g + Var(p)]}2

> (G-g)(G+ g)Var(p){均r(p)-2[句 +Var(p)(G+ g)] }_f'I

{[G+hr(p)][g+VGY(p)]}2 <

->

iff Var(p)=2[Gg+Var(p)(G+g)] <

司Var(k')- Var(k)]

Case 1. If Var(p)> 2[Gg+Var(p)(G+g)], then

θ Var(p)

133

That means that there is a positive induced effect on voluntary disc10sure

However, even though the capital market has no private knowledge- that 時，

Var(p) = ∞ -it is impossible for there to be a full-disc1osure equilibrium since

θ[Var(k') 一均r(k)] Var(p) = ∞ implies -L' -_. ,.-/ J = 1

θ Var(p)

In this event, the total effect of the quality of the investor's private

information drives a p叫ialequilibrium of the voluntary disc1osure.

。[Var(k') - Var(k)]

Case 2. If Var(p) 至 2[Gg+ Var(p)(G + g)], then 三 O

ðVar(p)

In this case, there is a negative induced effect on the voluntary disc10sure and the

total effect of voluntary disc10sure caused by the quality of the investors'

information is ambiguous. However, we can only exc1ude the full voluntary

disc10sure equilibrium.

Proof of Proposition 3 (1) (AMT+WMT+AWT) ... Var(t_、lJa+t + w,a + m)= y(AAd+AT+TM+A W+MT)=g , Var(k) = 一一主L一一. g+Var(p) .θ Var(k) θ Var(k) ðg 。1M ðg ðM

134 The Ro/e 0/ the Manager 's Human Capila/ in Mandatory and 均luntaryDisc/osures

. .θVar(k) [2g(g+Var(p))-g2] g2+2gVar(p) 、 A

。Ig [g + Var(p)]2 (g + Var(p))2

-ðg ðM

(AT+WT)(AM +AT+TM +AW +MW)-(A+T+W)(AMT+WMT+AWT)

(AM +AT+TM +AW +MW)2

A2T

=->

u.

(AM +AT+TM +AW +MT)"

.豆豆笠2>0 ðM (2) (G - g)[Gg + Var(p)(G + g)] .. Var(k') -Var(k) = [G+ Var(p)][g + Var(p)] Q.E.D

(一

旦旦

)[Var(p)(

~旦

)][G

+ Var(p)][g + Var(p)]

.θ[Var(k ') - Var(k)] δM'. U "ðM

。'M [G + Var(p)f[g + Var(p)]2

-(ATtVar(p)

[G+ Var(p)][g+ Var(p)](AM +AT +TM + AW + MT)4 <0.

Proof of Proposition 4 (1) Var(k)

=

一~一

，

g+ Var(p) δ Var(k) ðVar(k) 句 ðW ðg θW

. .θ Var(k) g2 + 2gVar(p) g[g + 2Var(p)] 、 n

Chiao Da Management Review 的 1.32 No. 1,2012 135

。g 一(MT+AT)(AM+AT+TM +AW +MW)-(A+M)(AMT+WMT+AWT)

。W (AM+AT+VM+AW+MW)2 MT(TA+MT)+AT(AT + TM) (AM +AT+VM +AW +MW)2 (AT+TM)2 巴 A (AM+AT+VM+AW+MW)2 - -,

坐坐2

>

0

òW

圳的

G

"

一

，

G+Var(p) . òVar(k ') òVar(k ')θG θW δG ÒW'

. .δVar(k') 2G[G + Var(p)]- G2 G[G + 2Var(p)]、 A

的 [G+Var(p)]2 [G+Var(p)]2 -δIG T(A+T+W)-(AT+TW) θ W (A+T+W)2 型企1>0 δW (2) 。[Var(k') - Var(k)] θW

立→

>

0.

(A+T+W)" Q.E.D. θG òg δG 司悔 。G . òg

(一一一一一)[一一一一+Var(p)(-一一+一一)][G+Var(p)][g + Var(p)]

一 δW òW'"òW δWθ W òW

[G

+ Var(p)]2[g + Var(p)]2 òG 句 (一一一一)(G- g)[Gg + Var(p)(G + g)] OWθ W [G + Var(p )]2[g + Var(p)]2

136 The Ro/e 0/ the Manager

s

Human Capita/ in Mandatory and Vo/untary Disclosures

θG ðg T2 (AT+TM)2

ðW δW (A+T+W)2 (AM+AT+VM+AW+MW)2

T2(AM +AT+VM +AW +MW)2一 (AT+TM)2(A+T+W)2 A \

(A+T+W)2(AM +AT+VM +AW +MW)2

.: T(AM +AT+VM +AW +MW)<(AT+TM)(A+T+W),

一一一-+ O<AT2

,

. ð[Var(k ') - v.αr(k)Lo δW