Document Type : Research Paper
Authors
1 Assistant Professor, Department of Economics, Allameh Tabataba'i University, Tehran, Iran
2 Professor, Department of Economics, Allameh Tabataba'i University, Tehran, Iran
3 Ph.D. Candidate in Economics, Financial Economics, Allameh Tabataba'i University, Tehran, Iran
Abstract
Companies adjust their voluntary information disclosure based on the volatilities they experience in their cash flows. Focusing on the digital industry segment of the Tehran Stock Exchange during the period 2012–2022, the current study aimed to investigate the effects of news related to risk, ambiguity, and ambiguity aversion on the policies adopted by firms regarding voluntary disclosure of soft and hard information. The analysis employed dynamic panel models to explain the voluntary disclosure behavior by the selected companies. The corporate voluntary disclosure lag was also used to capture disclosure dynamics, along with control variables including cost of capital, financial leverage, and stock liquidity. According to the results, managers of digital industry companies respond differently to news concerning risk, ambiguity, and ambiguity aversion depending on the type of information available for voluntary disclosure—whether disclosed conservatively or non-conservatively. This variation may be attributed to the nature of the disclosed information and its perceived credibility by investors. Furthermore, the findings confirmed that voluntary disclosures in previous periods positively influenced disclosures in subsequent periods, suggesting the presence of inertia in voluntary disclosure policies in the digital industry.
Introduction
The type of information disclosed by a company can be interpreted differently by participants in the stock market. According to the cheap talk literature, soft information is somewhat informative and can serve as an imperfect substitute for hard information (Kirk & Vincent, 2014). In contrast, hard information is quantitative and more reliable (Stein, 2002). Moreover, the market often interprets the disclosure of hard information as favorable news, whereas soft information is frequently perceived as unfavorable (Bertomeu & Marinovic, 2016). It is thus expected that firm managers employ different response tools—specifically, the disclosure of hard and soft information—when faced with news that affects firm value. Additionally, corporate disclosure environments are characterized by multi-period, multi-dimensional flows of information from the firm to the market (Guttman et al., 2014). Accordingly, it is hypothesized that the disclosure of hard and soft information in one period will encourage increased disclosure in subsequent periods, reflecting the presence of inertia in disclosure policies.
According to decision-making theories, investors’ reactions to a company’s information disclosure differ in the presence of ambiguity and risk. As the level of ambiguity increases—assuming investors are ambiguity-averse and risk-averse—stock price volatility rises because ambiguity leads investors to place greater weight on the possibility of an unfavorable future state (Brenner & Izhakian, 2018a; Epstein & Schneider, 2007a). Therefore, the effectiveness of an information disclosure policy under ambiguity may differ from its effectiveness under risk (Billings et al., 2015; Rava, 2022). In this respect, the present study aimed to model the transition of the information environment from risk to ambiguity. Furthermore, theoretical literature emphasizes that both the level of ambiguity and the degree of investors’ aversion or preference toward ambiguity independently influence how firm value is evaluated. Ignoring these independent effects in empirical model specifications can introduce specification errors, as these factors affect managers’ assessment of a firm’s financing costs and, consequently, their decisions regarding the amount of voluntary information disclosure needed to achieve their disclosure objectives. Accordingly, this study also examined the independent effects of changes in the level of ambiguity and investors’ ambiguity aversion on the level of voluntary information disclosure.
Materials and Methods
The sample consisted of eight companies operating in the digital industry segment of the Tehran Stock Exchange during the period 2012–2022. The detrended state of variables was used to extract news related to ambiguity, ambiguity aversion, and risk. Moreover, the generalized method of moments (GMM) was employed to address potential endogeneity among the research variables and improve the accuracy of coefficient estimates. The empirical model of the study is specified as follows:
In the model above, respectively, the variable ( ) represents the level of voluntary information disclosure by company i at time t in two different categories, that is, hard information and soft information. ( ) captures dynamics of voluntary disclosure for both types of information. ( ) denotes news related to investors’ ambiguity aversion, and ( ) represents news concerning the level of investors’ ambiguity. Moreover, ( ) corresponds to news about the firm’s risk. Control variables include ( ) as the weighted average cost of capital, ( ) as the firm’s financial leverage, and ( ) as the stock liquidity of the firm. The model also incorporates ( ) to account for cross-sectional effects, ( ) for time effects, and ( ) as the error term.
Results and Discussion
At the 95% confidence level, voluntary disclosure of both soft and hard information exhibited persistence over time (Tables 1 and 2). Moreover, when soft information was viewed as a managerial response tool to news affecting firm value, news related to investors’ ambiguity aversion ( variable) had a negative and statistically significant effect on the level of voluntary disclosure of soft information. Specifically, when this news is unfavorable—represented by a positive deviation from the expected trend—and given the negative regression coefficient, managers are expected to reduce the level of soft information disclosure in response to an unexpected increase in investors’ ambiguity aversion, thereby adopting a non-conservative reporting approach.
Similarly, news related to the level of investors’ ambiguity ( ) had a negative effect on soft information disclosure. When this news is favorable—indicated by a negative deviation from the expected trend—and given the negative coefficient, managers tend to pursue a non-conservative disclosure policy for soft information in an effort to reduce investors’ ambiguity, and vice versa. In contrast, news concerning the firm’s risk ( ) had a negative but statistically insignificant effect on the voluntary disclosure of soft information. This result may be attributed to the unverifiable nature of soft information for investors and managers’ limited ability to influence investors’ worst-case beliefs under conditions of ambiguity, particularly given the characteristics of the digital industry.
As shown in Table 2, when the firm manager’s response tool is hard information (the dependent variable) and news related to firm risk is unfavorable—indicated by a positive deviation from the expected trend—the negative regression coefficient suggests that managers respond strategically through voluntary disclosure. Specifically, managers adjust their disclosure of hard information in reaction to unfavorable risk-related news, a finding that is consistent with the results of Bertomeu et al. (2011).
Table 1. Regression Model Related to Voluntary Disclosure of Soft Information
(3)
(2)
(1)
GMM
estimation
Fixed effect
estimation
Pooled
estimation
Dependent variable: Soft information
0.64
(0.00)
0.52
(0.00)
0.78
(0.00)
Lag Soft Information
-8.7
(0.00)
-0.5
(0.26)
-0.26
(0.54)
AAN
-0.54
(0.01)
-0.019
(0.75)
0.035
(0.55)
DAN
-0.54
(0.44)
0.14
(0.89)
0.038
(0.95)
RiskN
0.34
(0.00)
0.005
(0.89)
0.03
(0.34)
WACC
4.76
(0.00)
0.86
(0.00)
0.45
(0.02)
Leverage
0.33
(0.00)
-0.041
(0.45)
-0.006
(0.9)
Stock Turnover
-0.61
(0.01)
0.11
(0.33)
0.07
(0.26)
_Cons
-
0.80
0.61
R-squared
-
3.31
(0.00)
-
F-Leamer
-2.91
(0.00)
-
-
Arellano-Bond test for AR (1)
0.97
(0.33)
-
-
Arellano-Bond test for AR (2)
8.00
(0.71)
-
-
Sargan-Hansen Test
The numbers in parentheses show the probability level of each coefficient statistic.
Source: Research findings
According to the results in Table 2, due to the verifiable nature of hard information for investors, managers can influence investors’ worst-case beliefs by disclosing hard information. In response to unexpected changes in investors’ ambiguity aversion and the level of ambiguity, managers expand the extent of voluntary disclosure. Moreover, given managers’ disclosure behavior in reaction to bad news concerning the level of ambiguity and investors’ ambiguity aversion, it seems that they adopt a conservative reporting approach in their voluntary disclosure policy.
Conclusion
Using the disclosure tools available to them, managers of digital industry companies listed on the Tehran Stock Exchange adjust the degree of conservatism in their voluntary information disclosure in response to news related to ambiguity, risk, and investors’ ambiguity aversion. This behavior critically depends on the nature of the information disclosed by the companies.
Table 2. Regression Model Related to Voluntary Disclosure of Hard Information
(3)
(2)
(1)
GMM
estimation
Fixed effect
estimation
Pooled
estimation
Dependent variable: Hard information
0.56
(0.03)
0.33
(0.00)
0.7
(0.00)
Lag Hard Information
17.12
(0.05)
0.5
(0.13)
0.16
(0.6)
AAN
4.02
(0.04)
0.01
(0.75)
0.005
(0.89)
DAN
-14.1
(0.05)
-0.38
(0.61)
-0.61
(0.18)
RiskN
0.51
(0.11)
0.02
(0.36)
0.03
(0.19)
WACC
-0.59
(0.77)
-0.06
(0.77)
0.12
(0.36)
Leverage
0.32
(0.02)
-0.005
(0.89)
0.03
(0.36)
Stock Turnover
-0.48
(0.27)
0.26
(0.00)
0.13
(0.00)
_Cons
-
0.65
0.66
R-squared
-
2.34
(0.03)
-
F-Leamer
-7.29
(0.00)
-
-
Arellano-Bond test for AR (1)
0.88
(0.37)
-
-
Arellano-Bond test for AR (2)
8.00
(0.88)
-
-
Sargan-Hansen Test
The numbers in parentheses show the probability level of each coefficient statistic.
Source: Research findings
Keywords
Main Subjects
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