INCENTIVES AND DISINCENTIVES FOR FINANCIAL DISCLOSURE - VOLUNTARY DISCLOSURE OF DEFINED BENEFIT PENSION PLAN INFORMATION BY CANADIAN FIRMS

Understanding managers' incentives to disclose information voluntarily has been described as ''the quintessential accounting problem'' (Verr ecchia 1990a, 245). In contrast to economic consequences (positive) th eories, Leftwich (1990, 41) states that ''there are few empirical inve stigations of the effect of an information role on accounting choice'' and that ''information economics has yet to yield a set of empiricall y testable propositions.'' This study addresses this empirical deficie ncy by testing hypotheses developed from two disclosure theories by ex amining Canadian firms' voluntary disclosure of defined benefit pensio n plan (DBPP) information. First, Verrecchia's (1983) proprietary cost theory states that the incentive to disclose information is a decreas ing function of the potential proprietary costs attached to a disclosu re and an increasing function of the favorableness of the news in a di sclosure. Second, Diamond (1985) explains firms' voluntary disclosures through information cost savings. He shows that if a firm commits to a policy of disclosing relevant information, it will preempt investors ' private information search activity. This provides a pareto improvem ent through lower overall information production costs. This study dem onstrates the proprietary cost implications and valuation relevance of pension disclosures and then develops hypotheses and empirical surrog ates for proprietary costs and private information acquisition cost sa vings in this setting. The results are consistent with the proprietary cost theory but are equivocal with respect to the information cost sa vings hypothesis. Proprietary costs mitigate the adverse selection arg ument in favor of full disclosure; moreover, the disclosures are condi tioned on the favorableness of the news. Proxies representing propriet ary costs related to labor are negatively associated with firms' DBPP disclosures.