MEANING AND CREDIBILITY OF FORWARD-LOOKING DISCLOSURES: EVIDENCE FROM AN ENTRY GAME

Yıl 2020, Cilt: 7 Sayı: 4, 362 - 373, 31.12.2020

Hakan Karabacak

https://doi.org/10.17261/Pressacademia.2020.1328

Öz

Purpose- The study aims to find and analyze the equilibria for the forward-looking disclosures using game theory and to investigate the information signaling mechanism of such disclosures focusing on the credibility and meaning of them.
Methodology- The study uses a cheap-talk game setting as a special form of signaling game in which forward-looking information are examined as costless, nonbinding and non-verifiable claims sent to a potential Entrant by the Incumbent firm.
Findings- Equilibria are derived and neologism-proofness refinement is applied to rule out the implausible equilibria. Informative equilibrium exists only if the players’ preferences are more closely aligned. Entrant’s strategy is critical to determine which equilibrium is plausible. Under entry strategy, informative equilibrium is plausible and rules out the uncommunicative equilibria. However, under non-entry strategy, informative equilibrium fails to be plausible.
Conclusion- Only under the entry strategy, the Incumbent should disclose its private information, whereas, under non-entry strategy, the Incumbent should not reveal its private information. Furthermore, the uncommunicative equilibria indicate that despite the Entrant’s pessimism about future, the Entrant prefers to choose entry strategy when the entry cost is sufficiently low. Contrarily, despite the Entrant’s optimism, non-entry becomes optimal when the entry cost is relatively high.

Anahtar Kelimeler

Forward-looking information, disclosure, cheap-talk, neologism-proofness

Kaynakça

• AICPA (1994) Improving business reporting – a customer focus: meeting the information needs of investors and creditors, Comprehensive Report of the Special Committee on Financial Reporting (The Jenkins Report). American Institute of Certified Public Accountants. Retrieved from https://egrove.olemiss.edu/aicpa_comm/102/
• Baginski, S.P. Hassell J.M. & Kimbrough, M.D. (2004). Why do Managers explain their earnings forecasts? Journal of Accounting Research. 42: 1-29. DOİ: 10.1111/j.1475-679X.2004. 00127.x
• Baginski, S., Demers, E. Wang C. & Yu J. (2016). Contemporaneous verification of language: evidence from management earnings forecasts. Review of Accounting Studies. 21(1): 165-197. DOİ: 10.1007/s11142-015-9347-6
• Banks, J.S. & Sobel, J. (1987). Equilibrium selection in signaling games. Econometrica 55: 647–661. DOİ: 10.2307/1913604
• Beattie, V. McInnes, B. & Fearnley, S. (2004). A methodology for analyzing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes. Accounting Forum. 28: 205-236. DOİ: 10.1016/j.accfor.2004.07.001
• Chen, Y. Kartik, N. & Sobel, J. (2008). Selecting cheap-talk equilibria. Econometrica. 76: 117-136. DOİ: 10.1111/j.0012-9682.2008. 00819.x
• Cho, I.K. & Kreps, D. (1987). Signaling games and stable equilibria. Quarterly Journal of Economics. 102: 179–221. DOİ: 10.2307/1885060.
• Clarkson, P. M., Kao, J.L. & Richardson, G.D. (1999). Evidence that management discussion and analysis (MD&A) is a part of a firm’s overall disclosure package. Contemporary Accounting Research. 16: 111-134. DOİ: 10.1111/j.1911-3846.1999.tb00576.x
• Clatworthy, M.A. & Jones, M. J. (2006). Differential patterns of textual characteristics and company performance in the chairman's statement. Accounting, Auditing & Accountability Journal. 19: 493-511. DOİ: 10.1108/09513570610679100.
• Crawford W.P. & Sobel, J. (1982). Strategic information transmission. Econometrica. 50: 1431-1451.
• Crawford, V. (1998). A survey of experiments on communication via cheap-talk. Journal of Economic theory. 78: 286–298. DOİ: 10.1006/jeth.1997.2359
• de Groot Ruiz, A. Offerman, T. & Onderstal, S. (2015). Equilibrium selection in experimental cheap-talk games. Games and Economic Behavior. 14-25. DOİ: 10.1016/j.geb.2015.03.011
• D'Augusta, C. & DeAngelis, M. D. (2020). Does accounting conservatism discipline qualitative disclosure? evidence from tone management in the MD&A (March 10, 2020). Contemporary Accounting Research, Forthcoming, SSRN: https://ssrn.com/abstract=3555122
• Darrough, M. N. (1993). Disclosure policy and competition: cournot vs bertrand. Accounting Review. 68: 534-561. DOİ: 10.2307/248200
• Darrough, M.N. & Stoughton, N.M. (1990). Financial disclosure policy in an entry game. Journal of Accounting and Economics. 12: 219-243. DOİ: 10.1016/0165-4101(90)90048-9.
• Farrell, J. (1985). Credible neologisms in games of communication. Working Paper No. 386, MIT
• Farrell, J. (1987). Cheap-talk, coordination, and entry. Rand Journal of Economics. 18: 34-39.
• Farrell, J. (1993). Meaning and credibility in cheap-talk game. Games and Economic Behavior. 5: 514-531.
• Farrell, J. & Gibbons, R. (1989). Cheap-talk can matter in bargaining. Journal of Economic Theory. 48: 221-237. DOİ: 10.1016/0022-0531(89)90125-7
• Feltham G.A. & Xie J.Z. (1992). Voluntary Financial disclosure in an entry game with continua of types. Contemporary Accounting Research. 9: 46-80. DOİ: 10.1111/j.1911-3846.1992.tb00869.x
• Frankel, R. McNichols, M. & Wilson, P. (1995). Discretionary disclosure and external financing. The Accounting Review. 70: 135-150. DOİ: 10.2307/248392
• Fudenberg, D. & Tirole J. (1991). Perfect bayesian equilibrium and sequential equilibrium. Journal of Economic Theory. 53: 236-260. DOİ: 10.1016/0022-0531(91)90155-W.
• Gibbons, R. (1992). Game theory for applied economists. Princeton University Press.
• Gigler, F. (1994) Self-enforcing voluntary disclosures. Journal of Accounting Research. 32: 224-240. DOİ: 10.2307/2491283
• Harsanyi, J.C. (1967). Games with incomplete information played by “bayesian” players, part I: the basic model. Management Science. 14: 159-182. DOİ: 10.1287/mnsc.14.3.159
• Harsanyi, J.C. (1968). Games with Incomplete information played by “bayesian” players, part II: bayesian equilibrium points. Management Science. 14: 320-334. DOİ: 10.1287/mnsc.14.5.320
• Kent, P. & Ung, K. (2003). Voluntary disclosure of forward-looking earnings information in Australia. Australian Journal of Management. 28: 273-285. DOİ: 10.1177/03189620302800303.
• Kim, J.W. & Shi, Y. (2011). Voluntary disclosure and the cost of equity capital: evidence from management earnings forecasts. Journal of Accounting and Public Policy. 30: 348-366. DOİ: 10.1145/3226116.3226140.
• Lev, B. & Penman, S.H. (1990). Voluntary forecast disclosure, nondisclosure, and stock prices. Journal of Accounting Research. 28: 49–75. DOİ: 10.2307/2491217.
• Li, Y. Li, C. & Gao, Y. (2020). Voluntary disclosures and peer-to-peer lending decisions: Evidence from the repeated game. Frontiers of Business Research in China. 14(7). Retrieved from https://link.springer.com/article/10.1186%2Fs11782-020-00075-5
• Matthews, S. Okuno-Fuji M. & Postlewaite, A. (1991). Refining cheap-talk equilibria. Journal of Economic Theory. 55: 247-73.
• Newman, P. & Sansing, R. (1993). Disclosure policies with multiple users. Journal of Accounting Research. 31: 92-112. DOİ: 10.2307/2491043
• O’Sullivan M. Percy, M. & Stewart, J. (2008). Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report. Journal of Management & Governance. 12: 5-35. DOİ: 10.1007/s10997-007-9039-0
• Park, I.U. (2002). Cheap-talk coordination of entry by privately informed firms. Rand Journal of Economics. 33: 377-393. DOİ: 10.2307/3087463
• Rabin, M. (1990). Communication between rational agents. Journal of Economic Theory. 51: 144-170. DOİ: 10.1016/0022-0531(90)90055-O.
• Rabin, M. & Sobel, J. (1996). Deviations, dynamics, and equilibrium refinements. Journal of Economic Theory. 68: 1-25. DOİ: 10.1006/jeth.1996.0001
• Stocken, P.C. (2000). Credibility of Voluntary Disclosure, RAND Journal of Economics, 31(2): 359-374
• Verrecchia, R.E. (1983). Discretionary disclosure. Journal of Accounting and Economics. 5: 179–194. DOİ: 10.1016/0165-4101(83)90011-3.
• Wagenhofer, A. (1990). Voluntary disclosure with a strategic opponent. Journal of Accounting and Economics 12: 341–363. DOİ: 10.1016/0165-4101(90)90020-5