The descriptive validity of the King, Pownall, and Waymire (1990) framework and its implications for regulation fair disclosure
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This dissertation consists of two essays. The first essay examines the descriptive validity of the King, Pownall, and Waymire (1990) (KPW hereafter) framework in explaining why managers voluntarily disclose earnings-related information. In Stage A of the KPW framework, managers decide whether to choose disclosure or nondisclosure. Consistent with KPW’s predictions, I find that firms with higher transaction cost savings from disclosure and lower proprietary information costs are more likely to choose disclosure over nondisclosure. In Stage B, managers who have chosen disclosure now choose whether to disclose publicly or privately through analysts. Consistent with KPW’s predictions, I find that managers are more likely to choose private disclosure over public disclosure if the firms has higher proprietary information costs and if the firm’s earnings-related information has more transfer value for analysts (i.e., private disclosure of the firm’s earnings-related information can provide an information transfer that helps the analyst predict earnings of other firms in the same industry). The second essay provides sharper tests of the effects of Regulation Fair Disclosure (Reg FD hereafter) by focusing on the pre-FD private disclosers. Consistent with hypotheses derived from the KPW framework, I show that pre-FD private disclosers with higher potential transaction cost savings from public disclosure and lower proprietary information costs are more likely to replace private guidance with new public disclosures after Reg FD. Further analysis reveals that these new public disclosures are sufficiently informative to prevent impairment of these firms’ information environments. In contrast, pre-FD private disclosers with lower potential transaction cost savings from public disclosure and higher proprietary information costs are more likely to replace private disclosure with nondisclosure. This evidence that firms change their disclosure policies in a manner predicted by theory can help policymakers anticipate which firms are more likely to be adversely affected by new regulations. I also provide evidence on the extent to which firms’ information environments were adversely affected by Reg FD. I find that over half of the pre-FD private disclosers replace private disclosure with nondisclosure, and I show that these firms experience a significant deterioration in their information environments.