Do Career Concerns Affect the Delay of Bad News Disclosure?

Theory argues that career concerns encourage managers to withhold bad news in the hopes that subsequent events will turn in their favor. However, empirical research finds that government regulation (i.e., Regulation Fair Disclosure, or “Reg FD”) eliminates this problem, despite any link between Reg FD and career concerns. The purpose of this paper is to examine whether career concerns affect the delay of bad news disclosure. We conduct our analyses in two stages. First, we show that research design problems led prior literature to overstate the extent to which Reg FD reduces the relative delay of bad news disclosure. We find that managers delay the disclosure of bad news after Reg FD, providing implicit evidence that career concerns might be a factor in the decision to delay bad news disclosure. Second, we identify a compensation contract (i.e., ex-ante severance pay agreements) that firms use to explicitly reduce their CEO’s career concerns. We find that if managers are promised a sufficiently large payment in the event of dismissal, they no longer delay the disclosure of bad news relative to good news. Overall, our findings provide strong support that managers delay bad news disclosure due to career concerns and suggest a mechanism through which firms can mitigate the delay.