Review of Accounting Studies, 3, 169–173 (1998)c© 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.

Discussion of “Bridging the Information Gap:Quarterly Conference Calls as a Medium forVoluntary Disclosure”

MARK LANGKenan-Flagler Business School, University of North Carolina

My comments have three parts: (1) a characterization of the literature, (2) a discussion ofthis paper’s contributions and limitations, and (3) some thoughts on potential directions forfuture research on conference calls.

Literature

At least three observations probably account for the substantial research literature on vol-untary disclosure. First, there is a significant gap between the potentially value-relevantinformation that managers have and what they are required to disclose. Management facesa demand for additional information and continually chooses a response to that informationasymmetry.

Second, voluntary disclosure is pervasive. Management consistently provides informa-tion not required under the mandatory reporting system. At one extreme is purely voluntarydisclosure like many press releases and direct communications with analysts. At the otherextreme, management chooses how much detail to provide in the financial statements andwhich accounting methods to employ. Third, firms’ disclosure policies seem to systemati-cally differ in terms of the amount and types of disclosure provided. Some firms are knownfor being forthcoming while others tend to be much more reticent.

Given these three observations and the long history of voluntary disclosure research, it isstriking that we know relatively little empirically about potentially the most fundamentalvoluntary disclosure question: Do firms benefit from having more forthcoming disclosurepolicies and, if so, how do the benefits accrue and how large are they? Put another way,the literature has little to offer the manager trading off costs and benefits in setting thefirm’s disclosure policy. I view this as the fundamental question underlying all voluntarydisclosure research.

Conceptually, answering the question simply involves correlating a measure of disclo-sure policy with measures of potential benefits and costs. However, the primary obstacleconfronting researchers in this area has been the difficulty in measuring disclosure policyand the resulting benefits and costs. For example, there are intuitive and theoretical reasonsto believe that voluntary disclosure should reduce cost of capital. However, both the levelof disclosure and cost of capital are notoriously difficult to measure.

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As a consequence, research in this area has primarily taken an indirect approach tounderstanding the costs and benefits of voluntary disclosure, beginning with contexts inwhich the measurement issues are less pronounced and building a weight of evidence onthe potential motivations for disclosure.

The first stream of research, beginning with the management forecast literature, assesseswhether voluntarily disclosed information is credible. Given that voluntary disclosure isnot audited and may not be verifiable, the possibility exists that it might be so noisy orbiased as to render it unusable. A necessary condition for disclosure to be beneficial wouldseem to be some level of credibility.

Research based both on direct measures (e.g., bias and accuracy of management earningsforecasts) and indirect measures (e.g., stock price response) indicates that voluntary disclo-sure is credible and, therefore, has the potential to mitigate information asymmetry. Mostclosely related to this paper, Frankel, Johnson, and Skinner (1997), show that share pricevolatility and volume are elevated during conference calls, suggesting that conference callsconvey information.

The second stream of research (to which this paper belongs) examines the characteristicsof firms with more forthcoming disclosure policies. Under the assumption that firms choosevoluntary disclosure policy with an understanding of incentives to disclose, this literatureprovides indirect evidence on the costs and benefits of disclosure. Research indicates, forexample, that voluntary disclosure is higher for larger firms, suggesting that either the costis lower or the benefit higher for large firms. Similarly, disclosure levels are higher for firmsperforming well and for firms issuing securities, suggesting that disclosure may be used toincrease share price and increase the proceeds from equity offering. Closest to this paper,there is also some evidence on the link between information asymmetry and disclosure(e.g., Lang and Lundholm (1993)) but the tests and results are relatively weak. This linkseems particularly important since most voluntary disclosure theories focus on reductionof information asymmetry.

A third branch of research goes a step further in attempting to more directly assess thelink between disclosure and cost of capital. The difficulty in this research is measuring costof capital. Researchers like Lang and Lundholm (1996) and Healy, Palepu, and Sweeney(1997) use analysts’ measures of information environment and indirect measures of costof capital to infer whether voluntary disclosure reduces cost of capital. At the extreme,researchers are beginning to assess the effects of disclosure directly. For example, Botosan(1997) attempts to back out cost of capital in a valuation context to infer disclosure effects.While this research is closest to the fundamental question of assessing the benefits ofdisclosure, it is also the most challenging in terms of measurement issues. However,findings in this area are complemented by the findings from the research that takes a lessdirect approach in affirming conclusions.

Contribution and Limitations

As noted above, this paper fits into the branch of literature that examines the characteristicsof firms adopting more forthcoming disclosure policies. While the question is not new,the paper contributes by introducing new empirical proxies for disclosure and information

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asymmetry, both of which are very difficult to measure. Given that measurement is thefundamental challenge in this literature, this contribution is potentially substantial.

Of the two proxies introduced in this paper, the disclosure proxy is the more substantive.One of the major issues in voluntary disclosure research is finding a proxy for disclosurepolicy that is comprehensive, objective, and available for a wide range of firms. Compre-hensiveness is important because most voluntary disclosure research assumes (as does thispaper) that the disclosure proxy measures incremental disclosure as opposed to a substitutefor other types of disclosure. In the theoretical research on which the paper is based, theissue is overall disclosure level, not disclosure using a specific medium. However, the moreone expands the disclosure proxy in terms of comprehensiveness, the more one typicallysacrifices objectivity since aggregating different types of disclosure requires an implicitweighting scheme that is almost certainly subjective. Further, identifying all avenues ofdisclosure is difficult and quantifying the content of disclosures time-consuming.

Conference calls are a convenient measure of disclosure because they cover a wide rangeof firms and it is relatively easy to determine whether a firm conducts conference calls.However, there are several potential issues with the use of conference calls as a proxyfor overall disclosure. Most fundamentally, such use presumes conference calls constituteincremental disclosure, not a substitute for other types of disclosure (i.e., that conference callfirms disclose more in total than other firms). That is particularly an issue with conferencecalls because a frequently-articulated motivation for their use is as a substitute for directcontact with analysts and investors. The argument is that conference calls are a moreefficient means to communicate information that would otherwise be disclosed throughnumerous individual calls. If that is true, conference call firms may have the same amountof overall disclosure as non-conference call firms—only the medium is different.

To the extent this adds noise to the analysis, it should only weaken the results. However,there are two reasons why the issue may go beyond that. First, it is not clear what theproxy for information asymmetry captures. For example, consider the fact that conferencecalls appear to represent an emerging technology in the sense that they are a relative recentphenomenon, increasing in popularity. The industries identified as facing high levels ofinformation asymmetry are those which tend to be fast-growing and have high levels ofintangible assets, suggesting that they are likely to be in industries characterized by rapidchange and innovation. To the extent that firms in those industries are more innovative,they may adopt new technology more readily because, for example, the cost is lower. Asa consequence, what appears to be driven by a higher benefit to reducing informationasymmetry may actually reflect lower cost of innovation.

Second, conference calls may be more effective in mitigating specific types of informationasymmetry. Suppose that it is the case that the information that high growth, young firmshave to convey to the market is more difficult to communicate through traditional meansbecause, for example, it is more difficult to quantify or requires additional explanation.Then, the fact that conference calls are prevalent in those industries could reflect differencesin thetypeof information asymmetry, not in thelevelof asymmetry.

Finally, this measure presumes that all conference calls are equally informative. As withany kind of disclosure, there are probably some firms that are particularly informative intheir conference calls and others that simply reiterate information available from other

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sources. This is less of an issue since it is harder to argue that it creates any systematic bias.The preceding discussion is not intended to minimize the contribution of the paper. All

proxies for voluntary disclosure and for information asymmetry considered to date sharesome or all of the limitations of conference calls. One way to view the voluntary disclosureliterature is as building a weight of evidence on determinants of disclosure choice ratherthan evaluating specific disclosures in isolation.

Future Directions

One potentially important aspect of conference calls that the paper does not exploit is thefact that they are a relatively recent phenomenon. In part, that is a function of the cross-sectional nature of the data set. However, it seems possible to expand the data to includeinformation on when the sample firms initiated conference calls.

There are several ways in which an expanded analysis could be informative. First, acharacteristic of conference calls that is fairly unique and is not exploited in the paperis the interplay between technology and disclosure choice. It seems that the impetus forconference calls was the development of technology that permitted wide spread use at lowcost. Given advances in technology and perceived deficiencies of traditional reporting, thatis likely to be a recurring situation, making the evolution of disclosure choice in the faceof technological advances an important issue in its own right that is not addressed in thispaper.

One of the interesting attributes of conference calls is that, once initiated, firms tendto continue making them. Therefore, the choice to have a conference call constitutes acommitment to a change in disclosure policy. Further, the advent of conference callsappears to be a response to a technological innovation. As a consequence, this may providea fitting context in which to conduct an “event study” of disclosure choice. The developmentof the technology provides an exogenous shock to disclosure possibilities and one couldexamine the ordering of firms adopting the technology as well as any benefits or otherchanges realized by the firms.

Also, conference calls may provide a useful environment in which to address the morefundamental question of whether and how voluntary disclosure benefits firms. The paperprovides indirect evidence in suggesting that conference calls are an attempt to mitigateinformation asymmetry. However, if the date on conference call initiations could be iden-tified, this might provide a fairly unique context in which to attempt to examine directlythe consequences of changes in disclosure policy for several reasons. First, there is a fairlydiscrete point at which disclosure policy changes, unlike many other aspects of disclosurepolicy. Second, the types of firms initiating conference calls may be those for which areduction in cost of capital due to reduced information asymmetry is most easily detectable.If one accepts the conclusions of the paper, conference call firms are those that face sub-stantial information asymmetry and for which conference calls are particularly effectivein reducing information asymmetry. Further, the sample includes smaller firms for whichvoluntary disclosure is likely to be a more important source of information to the marketsince there are fewer competing sources. Therefore, reductions in cost of capital in responseto initiations of conference calls may be of a large enough magnitude to be detectable.

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References

Botosan, C. (1997). “Disclosure Level and the Cost of Equity.”The Accounting Review72, 323–349.Frankel, R., M. Johnson, and D. Skinner. (1997). “An Empirical Examination of Conference Calls as a Voluntary

Disclosure Medium.” Working paper, University of Michigan.Healy, P., K. Palepu, and A. Sweeney. (1996). “Do Firms Benefit from Expanded Voluntary Disclosure?””

Working paper, Harvard Business School.Lang, M., and R. Lundholm. (1993). “Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures.”

Journal of Accounting Research31, 246–271.Lang, M., and R. Lundholm. (1996). “Corporate Disclosure Policy and Analyst Behavior.”The Accounting

Review71, 467–492.