Debt and Voluntary Disclosure

In attempting to understand voluntary corporate disclosure, many empirical studies have used leverage as an explanatory variable. One reason for an association between debt and disclosure relates to the agency costs of the shareholder-bondholder conflict. By voluntarily disclosing information, shareholders may be able to reduce this agency cost. We provide an additional reason why debt and disclosure may be positively related by focusing on the shareholder-manager relationship. Our explanation is driven by the optionlike feature of shareholder ownership in the presence of debt and the detrimental effect of diversification (reduced volatility) on option value. The diversification effect is introduced in our model when the shareholders use a "portfolio of managers" over the life of the firm. In attempting to understand voluntary corporate disclosure, many empirical studies have used leverage as an explanatory variable. 1 One reason for an association between debt and disclosure relat..