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Author(s)

Ronald A. Dye

Anne Beyer

We develop a model of voluntary disclosures by a manager whose firm issues two securities, publicly traded debt and equity, and where the manager's compensation is based on a weighted average of the prices of these securities. Several appealing empirical predictions emerge from the analysis including: 1. the relationship between debt and disclosure is not monotonic: at low levels of indebtedness, an increase in the firm's level of debt financing causes the manager to disclose less, whereas at high levels of indebtedness, a further increase in the level of debt financing causes the manager to disclose more; 2. increasing the weight placed on the price of the firm's equity in the manager's contract uniformly results in the manager disclosing less; 3. a contract that puts equal weight on debt and equity prices results in the manager making the most voluntary disclosures, but is undesirable because such a contract results in the manager adopting too low effort (relative to other contracts that place more weight on equity than debt).
Date Published: 2021
Citations: Dye, Ronald A., Anne Beyer. 2021. Debt and Voluntary Disclosure. The Accounting Review.