Essays on disclosure

Vincenzi, R (2020) Essays on disclosure. Doctoral thesis, University of London: London Business School.

Abstract

As part of the first paper in my thesis, titled "Do Managers' Voluntary Disclosures Cater to Bond Investors? Evidence from an Unconventional Monetary Policy", I explore the relation between firms' voluntary disclosure and bondholders' information needs. Despite the significant attention devoted by extant research to companies? voluntary disclosures, we still do not know much about how bondholders use it. However, since bondholders need to rely on the information that is publicly disclosed by firms, the role of voluntary disclosure in the public debt market is likely non-trivial. I examine this topic by developing a set of novel measures of firms' voluntary disclosures with specific credit relevance and by collecting novel data on companies' management guidance and press releases. Since firms' information environments have an endogenous nature, I establish a causal link by relying on an exogenous change to bondholders' information needs due to a monetary policy tool implemented by the European Central Bank in 2016 (the Corporate Sector Purchase Program). I document that firms with outstanding bonds issue voluntary disclosures of credit relevant information as a function of the characteristics of their bondholder base. More specifically, I show that bond issuers respond to an exogenous decrease in their bondholders' demand for information by curtailing credit relevant disclosure. Overall, my paper sheds light on the use of financial information by a particular and important group of capital providers who primarily need to assess firms' credit health (similar to relationship lenders), but who can only rely on public available information (similar to equity investors). In the second paper, titled "Are Synergy Estimates Credible? Incentives to Disclose Merger Synergies", co-authored with James Ryans and Christian Laux, we analyze the causes and consequences of the decision to disclose specific numeric estimates of expected synergies around merger announcements. Mergers are critical determinants of a firm's prospects and are, at the same time, characterized by significant information asymmetries which involve a varied group of market participants. Using a novel 5 sample of management forecasts of expected synergies, we find that synergy expectations are released to the market consistently with conventional voluntary disclosure motives. For instance, managers of bidding firms release specific numeric estimates of future merger-related savings when they need to support the valuation of the stock of their company and when they need to persuade the shareholders of the target to approve the deal. We also document that disclosure of expected synergies around merger announcements are credible (i.e., they are associated with future actual cost savings) and predict significant accounting events (i.e., they are related to lower future goodwill impairments). In general, our evidence highlights that management disclosures of synergy estimates at the time of deal announcements have important effects, as also acknowledged by market practitioners and regulators. In the third paper, titled "Customer Concentration and the Debt Structure", co-authored with Florin Vasvari and Serena Morricone, we examine the effect of US public firms' customer base concentration on their debt structure. We argue that large customers leverage their greater bargaining power against their suppliers thus increasing suppliers' credit risk. In turn, these suppliers respond by increasing their debt specialization (i.e., borrowing from a more limited set of lenders), as fewer lenders are incentivized to invest in information collection efforts to mitigate the higher credit risk. Consistent with these arguments, we first document that borrowing firms with concentrated customers experience significant profitability and cash flow shortfalls, greater cash flow volatility, and provide greater financing to their customers. We then find that, among firms with major corporate customers, borrowing firms with a higher customer concentration issue fewer types of debt. The association between customer concentration and debt specialization is stronger when major customers of borrowing firms are less financially sound and more informationally opaque and thus represent a potentially higher source of supply-chain risk. Finally, we posit that borrowers with concentrated customers choose to rely on fewer debt types as this decreases their cost of financing.