Voluntary Disclosure, Moral Hazard, and Default Risk

We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm's cash flows. Bad -news disclosure is rewarded by a lower borrowing cost relative to the no -evidence case, whereas no disclosure leads to higher borrowing costs. For a given capital structure, disclosure reduces the firm's default risk by lowering its pay -for -performance sensitivity. However, for a set of low -profitability firms, the anticipation of future disclosure of information by managers lowers both firm value and managerial rents at the financing stage because of a reduction in the firm's initial liquidity. The model can reconcile the empirical evidence on the effects of providing earnings guidance, especially for loss firms.