Mandatory Quarterly Reporting And Managerial Myopia

In order to improve the timeliness of information disclosure of listed firms in China,reduce information asymmetry,and protect investors,mandatory quarterly reporting was introduced in China.But does the disclosure regulation have any potential negative effects?In recent years,opinions seem to be divided on whether the mandatory quarterly reporting encourages or impedes managerial myopia among practitioners and researchers around the world(Wagenhofer 2014)[1]Most managers of listed firms and some regulators believe that the mandatory quarterly reporting causes investors and listed firms become too focused on short-term performance,which makes managers become more and more myopic in order to improve short-term performance and less willing to invest in those projects that could create value in the long run(hereafter"Myopia Effect").However,according to some empirical evidence,we may come to a conclusion that contradicts the opinion of those practitioners.The increased disclosure significantly reduces the cost of capital and agency costs of listed firms,which should improve the ability and willingness respectively of the managers to make long-term investments and hence impede managerial myopia(hereafter "Information Effect").Therefore,whether the mandatory quarterly reporting encourages or impedes managerial myopia of firms is an open empirical question.This paper examines whether the mandatory quarterly reporting encourages or impedes managerial myopia of firms in the transitional economy of China.My empirical analysis shows that in general,relative to the period when listed firms are not required to disclose quarterly reports,listed firms in the period when they are required to disclose that reports significantly reduce their capital expenditures,changes in long-term assets and firm innovation,which indicates that managers become more myopic after the quarterly reporting become mandatory.The results do not change after conducting some robust tests including a differences-in-differences design,changing the measurement of dependent variables,and an international study.Additional tests show that the relationship between mandatory quarterly reporting and managerial myopia is affected by the product market competition faced by firms and the state ownership of firms.My empirical results show that the increase in myopia is more pronounced for firms that are non-SOEs and in unregulated industries,which face more competition.It indicates that the mandatory quarterly reporting brings too much short-term pressure on managers,resulting in myopic investment behavior in order to avoid the negative influence on short-term performance.The empirical analysis on the incentives why managers become more myopic after the quarterly reporting becomes mandatory shows that the Myopia Effect is stronger for firms with higher managerial holdings and in financial distress.It indicates that the equity incentive and career concern may be the possible incentives why managers become more focused on shortterm performance and more myopic.This paper makes four contributions to extant literature and practice.First,the paper contributes to work on the economic consequences of disclosure regulations,especially to those on the effect of disclosure regulations on the specific firm behavior,namely the real effect.It responds to the call from Leuz and Wyocki(2016)[2]for more research on this field.Second,this paper contributes to the literature that examines the negative effect of mandatory quarterly reporting.Prior literature only focuses on the foreign capital markets and it also mainly concentrates on the positive effects of this regulation.Third,this paper contributes to a growing stream of papers that try to examine the determinants of managerial myopia or firm innovation.The extant literature still lacks the empirical evidence on how disclosure regulations would affect managerial myopia.Finally,this paper has implications for practitioners as the merits and demerits continue to be discussed by them all around the world.This paper could help people have a comprehensive understanding on the potential economic costs of mandatory quarterly reporting.