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we're here today was Wharton accounting
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professor Frank Joe who's going to talk
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to us about someone who's recent
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research Frank thanks for being here
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thank you for inviting me and could you
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first give us kind of a short summary of
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the paper what question you were trying
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to answer okay so in my job market paper
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I basic look at how does investor
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learning affect firms voluntary
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disclosure decisions and by voluntary
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disclosure decision and mean management
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annual earnings forecast decisions we
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know that management and the earnings
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work as a very prevalent so it's an
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important question to ask what are the
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forces that shape management earnings
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pork at decisions and empirically there
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is a very interesting phenomenon which
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is that earnings forecasts decision tend
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to be sticky over time and I basically
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build a model trying to explain why this
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thickness occurs and try to empirically
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quantify this mechanism that I proposed
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and the mechanism is basically is that
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the learning about unknown firm
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profitability we know that investor they
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don't know everything so is a reasonable
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assumption that inverted they don't know
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from profitability and just by taking
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this simple premise I show that in such
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a learning leads to sticky disclosure
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incentives and the mechanism is very
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simple basically investors they have
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their prior information so that's you
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investing Apple and you think that Apple
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is a pretty good firm just by observing
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that ad post performance and drops a
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little bit in one time doesn't mean that
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Apple is about firm for you so in other
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words in that church beliefs are
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speaking over time and I show that
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investors build if in turn affect
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managers voluntary disclosure decisions
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and that would in turn lead to sticky
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disclosure incentives and my structural
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estimation shows that investor learning
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leads to very sticky disclosure
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incentives so that there is 10% increase
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in the likelihood of disclosure in one
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year caused by investor learning that
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would in turn lead to about 10% increase
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in the likelihood of disclosure in the
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next year so basically I mean for
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investors it's the more they learn the
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more they kind of confirm their beliefs
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about the firm yes and then the more
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they confirm their beliefs the more of
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the firm wants
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to disclose information about itself
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okay so the set of the investors
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believes on firm disclosure choice
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depends on whether the beliefs are
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optimistic or pessimistic if investors
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believe you're optimistic relative the
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actual firm profitability and that in
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turn leaves less room for the manager to
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convey good news and therefore the
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disclosure probability would go down and
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this basic dis research shows that it's
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important for the manager to take into
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account where investors beliefs are when
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they the manager decides whether to
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disclose information or not so basically
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to be to teach it about disclosure
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versus where investors are with the firm
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at that interview time yeah and so
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Charlie kind of going further with that
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and if I'm a firm or if I'm an investor
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how could I practically apply this
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research either to my firm decisions or
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how I act on my activity as an investor
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okay so this research is more from the
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managers perspective to tell the manager
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to pay attention to where investors are
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and often you empirically we see that
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you know some firms release some
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information which is not like a big
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surprise but there's a very large market
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reaction versus other times and when man
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like the manager really some information
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that is like basically in you know
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there's a very large surprise but
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there's very little stock price
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movements and my rates of basic tells
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manager to pay attention to where
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investors beliefs are and how uncertain
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they are investors are about their
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beliefs when manager decides whether to
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disclose information or not now are
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there key indicators in terms of where
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what investors beliefs are in a given
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time it is it just stock price or there
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are other things that they would be
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looking at to kind of stage back so the
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key component would be the stock price
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audited wasn't manager he or herself
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believes where the firm fundamentals are
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yeah so that's a key in because the
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manager knows about a company but
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investor they don't know so they have
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some valuation about the firm but
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manager probably knows whether in my
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firm is good or not so based on that
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that's a key indicator of investors
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belief and of course in my research I
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structurally so using a model to buy all
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the investors believe so
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potentially my model can be useful
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because I show that the model actually
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states the data pretty well right and so
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what would next for this research are
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you gonna follow decide so currently has
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a working paper on how investors process
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information that is was held from them
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about 50% of the time management does
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not issue earnings guidance and
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typically when this happens it indicates
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bad news and the investor kind of know
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it's bad news but surprisingly what
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investor when you better prize the firm
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it actually over prizes it and when the
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earnings are announced there's a
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subsequent decline in firm value so this
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is potentially both important to
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investors and to managers because on the
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one hand manager they're supposed to
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inform investors about what's going on
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or the manager could statistically take
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advantage of the investors inability to
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process the lack of disclosure and from
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the investors perspective they need to
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understand what the implication of firm
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strategic decisions in this case is
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disclosure choice and firm makes all
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kinds of strategic decisions and it's
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probably true that investor have a hard
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time understanding them too so this is
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the follow-up research great Frank
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thanks for being with us today okay
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thank you
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[Music]
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you
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[Music]
