[Accounting] Suil Pae - Risk Choice and Voluntary Disclosure

Professor Suil Pae of Sungkyunkwan University&#39;s SKK GSB has published a paper in the top-tier journal <em>The Accounting Review</em>, revealing how investor risk aversion and private information affect cash flow accuracy and disclosure decisions.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> This paper presents a model in which investors price risk and a firm makes an investment to reduce its cash flow risk. Subsequently, the firm may or may not privately receive information about the future cash flow, whose disclosure is under its discretion. We show that the equilibrium cash flow precision increases with investor risk aversion, but decreases with the likelihood that the firm has private information and the quality of that information. In addition, the equilibrium probability of disclosure increases when the firm is more likely to have higher-quality private information, but it may increase or decrease when investor risk aversion increases. Using these comparative statics, we rationalize mixed empirical findings on the relation between risk and disclosure as equilibrium outcomes. The model is extended to a setting where the firm also makes an investment to increase the mean of its future cash flow.

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[Accounting] Suil Pae - Voluntary Disclosure When Information Quality Is Unknown

Professor Suil Pae of Sungkyunkwan University&#39;s SKK GSB, with co-author Eunhee Kim (Baruch College&ndash;CUNY), has published a paper in the prestigious journal The Accounting Review, revealing how firms decide what information to disclose. This paper helps predict firms&#39; behavior when disclosing information in real life.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> This paper presents a costly voluntary disclosure model in which the information quality of a signal about a firm&rsquo;s future cash flow is unknown, where the information quality, also called signal quality, refers to signal precision. Disclosure plays a dual role in firm valuation, providing information about both the cash flow and signal quality. We identify a necessary and sufficient condition under which the firm price under disclosure is a nonmonotonic and bounded function of the signal. Under this condition, as the disclosure cost increases, the equilibrium changes from an intermediate pool of undisclosed signals to a low-end pool of undisclosed signals, to two disjoint pools of undisclosed signals, and finally to no disclosure. Our results remain qualitatively unchanged when the firm may or may not have private information. Overall, this study offers alternative explanations for the empirical findings of why some firms disclose (withhold) seemingly bad (good) news.

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[Accounting] Suil Pae - Career Concerns and Financial Reporting Quality

Professor Suil Pae&#39;s paper, &quot;Career Concerns and Financial Reporting Quality,&quot; has been accepted for publication in the Contemporary Accounting Research.<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> Managerial career concerns could affect firm efficiency through financial reporting quality, but this important link has received relatively little attention in the literature. The present study examines this link by developing a model that has the following elements. A risk-neutral manager provides effort to increase the market value of the firm and to favorably influence the market assessment of her ability. Depending on the magnitude of career concerns, she either under- or overinvests effort relative to an efficiency-maximizing level. The analysis identifies conditions under which higher-quality reporting induces the manager to invest more effort. Under these conditions, the model is extended to a setting in which the manager also chooses the quality of financial reporting at some cost. In doing so, she seeks to reduce distortion in her effort investment. The equilibrium reporting quality and effort investment are determined by a trade-off between them. In the presence of high uncertainty about the firm&rsquo;s future cash flows, if the manager&rsquo;s career concerns exceed a threshold, she underinvests in reporting quality and overinvests effort. The empirical implication is a negative relation between managerial career concerns and financial reporting quality. To a large extent, this is consistent with findings in prior empirical studies. Thus, the present study offers a theoretical explanation for the empirical findings as an equilibrium outcome.<br /> <br /> &nbsp;

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