Discretionary disclosures, Human capital, Performance evaluation, Uncertainty

Theories of delegated monitoring predict that when public disclosure is costly, monitoring by a large investor leads management to supply more private information to that investor, and less public disclosure to other similarly aligned investors who free-ride off the monitor. We test this prediction in the setting where large shareholders contractually bind management to share private information. We find that after the execution of such contracts, firms improve their performance and reduce their public disclosures. Overall, our evidence supports the disclosure prediction of delegated monitoring theories, and is inconsistent with poor-performance and expropriation theories of disclosure.

Activist investors in a firm often voluntarily release information about their governance intentions to the public. Voluntary disclosure theory suggests that an activist investor will disclose when she expects other investors to respond positively and support her in upcoming corporate control contests. We find that activists’ disclosures are accompanied by positive abnormal returns, reductions in bid-ask spreads, and increases in future earnings relative to similar targets without voluntary activist disclosures. Disclosures by activists who demand a board seat (the most common demand) have the highest announcement returns, and disclosers also win proxy contests and directorships more frequently than non-disclosers. These findings suggest that the activist’s beliefs about investor response in both pricing and voting are an important driver of her disclosure choice.