Profit-Warning Disclosure and Agency Costs’ Reduction

Abstract

The asymmetry of information is one of the main reasons for agency conflicts between the manager and the shareholders who depend on the company's financial disclosure to make decisions. This need for information is even more acute in a context characterized by uncertainty, such as the current sanitary crisis Covid-19. Indeed, any information on the consequences of this crisis or future actions to be taken by quoted companies can relatively enlighten the investors. In Casablanca stock market, 20 profit-warnings were published due to the pandemic in order to warn about the financial profitability of 2020 that will be lower than expected. As a consequence, profit-warning disclosure has a negative impact on the share price as demonstrated by several studies besides the impact on the company image. Therefore, this disclosure is particularly controlled by financial market authorities to preserve shareholders’ rights. Given the stakes of profit-warning disclosure, the manager, who is the most informed person in the company, might hide such negative news from the market, governance mechanisms interfere to limit the manager’s discretionary space.

Thus, this article aims to present a theoretical discussion about the contribution of PW disclosure to the reduction of agency costs specially for the listed company. In fact, we will try to approach the subject through the various paradigms of governance theory. Since this disclosure corrects the forecast of profitability as expected by the investors, it consequently lowers the agency costs related to the over valuation of the company by the market as defined by Jensen (2004). In addition, the profit-warning can also be considered as a tool of reduction of information and knowledge asymmetry as respectively described by the disciplinary and the cognitive governance paradigms.

JEL Classification: G34, D83

Paper type: Theoretical Research