Business / Consumer Behavior
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Autor: anton 08 December 2010
Words: 532 | Pages: 3
Hypothesis: 2.0 a 2.3
In this section of the paper we can find the reason of the hypothesis itself, it predicts that if managers withhold, accumulate, and slowly release bad news, but leak and/or quickly disclose good news then the average negative stock price reaction to bad news disclosures will be of greater magnitude than the average magnitude of the positive stock price reaction to good news disclosures. They also develop hypothesis about cross-sectional variation in the magnitudes of stock price reactions to good and bad news disclosures as a function of attributes that proxy for managersâ€™ incentives and opportunities to withhold information. This assumptions presented in this paragraph are the main reason that the article is trying to explain for the behavior of the stock markets participants. Also we find a logical explication of why is possible for manager to withhold bad news.
First of all we need to understand that managers most reveal good or bad news symmetrically without withholding any news because new information is assumed to arrive randomly with managers having little control over the arrival of news. The article explains that the distribution of news reaching the manager is assumed to be symmetric, it seems reasonable to expect that randomly arriving good and bad news should have similar and symmetric distributional properties. Since the manager discloses all information, good and bad, quickly, its dissemination should generate symmetrically distributed stock price changes. As a logic matter it explains that if this information is correctly symmetrical the bad news and good news are supposed to be balance or equal.
As an explication of how does it start; managers reserve the bad news and they know they must reported but instead they decide to keep it until the have a lot of good news reported so the bad news would not be so affecting, and the moment for them is also correct when the it becomes too costly or difficult to withhold the bad news and this triggers disclosure. However, the manager hopes to â€œburyâ€ the accumulated bad news with good news that might arrive while the accumulated bad news has not yet reached the threshold level in which it must be reveal.
Because disclosure is costly, it is not always optimal for managers to disclose their information. Managers face many incentives with off-setting effects on their desire to disclose, withhold, or accelerate the release of good and bad information. First, disclosures reduce information asymmetry between the management and outside investors, and discourage investors from expending resources on private information-gathering activities. A lot of managers also disclose the information in a way of protecting to maximize the firmâ€™s current market value. But managers also can find themselves saying the information really fast before it appears through earnings reports and other channels.
Finally, managers weigh their career concerns against loss of reputation and other costs in deciding whether to withhold or accelerate the release of private information available to them. Good news disclosures ensure continued employment for the manager and can boost her wealth connected to firm value. In contrast, bad news disclosures reduce her wealth and can lead to quick termination even if a corporate event is beyond the managerâ€™s direct control.
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