Essays on corporate disclosure

Abstract

however, it increases (reduces) investors' withdrawals when they are optimistic (pessimistic) about the firm's project.

In the second chapter, we assess the effects of mandatory disclosure and managerial incentives on a firm's investment. Mandatory disclosure increases a manager's incentive to forego profitable projects if the manager incurs private costs to disclose information required for implementing the project. We then examine how shareholders attenuate the underinvestment problem by granting the manager's private benefits of control. Our analysis shows that shareholders ultimately benefit from the manager's private benefits when the underinvestment problem is severe. Moreover, we find that shareholders have more incentive to allow the manager's private benefits when the level of disclosure costs is higher, and the manager's ownership is lower.

In the third chapter, we examine the effects of a government bailout on corporate disclosure when a firm is exposed to the risk of investors withdrawing their investments from the firm. The government bailout affects the behavior of investors, which, in turn, alters the disclosure behavior of the firm. We find that the firm discloses less (more) than the case without a bailout when investors have pessimistic (optimistic) beliefs about the firm. These changes in disclosure decision reduce investors' expectations about the firm's fundamentals. Therefore, the government bailout can increase the likelihood of the firm facing a liquidity crisis if it distorts the disclosure behavior of the firm.

This dissertation consists of three essays on theoretical models of corporate disclosure. All three essays are written with Frederick Dongchuhl Oh. In the first chapter, we analyze a model in which a firm's manager privately learns about the expected return on the firm's project and strategically discloses it to investors (i.e., discretionary disclosure). Based on the manager's disclosure, investors decide whether to withdraw their investments from the firm. Our analysis indicates that investors' optimistic prior beliefs in the firm reduce the possibility of their withdrawals and the manager's incentive of discretionary disclosure, whereas pessimistic beliefs increase them. We further examine the effects of a commitment to reporting of bad news, namely, the conservative disclosure rule. This rule always suppresses the manager's incentive of discretionary disclosure