• Managerial Discretion in Information Disclosure and Skewness of Stock Returns

Abstract

The normal distribution of stock returns is most commonly adopted in traditional portfolio theory. However, there is a growing body of evidence indicating the asymmetric skewness in stock returns. The discretionary-disclosure hypothesis of Chen, Hong and Stein (2001) argues that the managers prefer to disclose good news right away, while dribbling bad news out slowly. This behavior tends to impart positive skewness to stock returns. The paper tests this theory at firm level by using data from the Taiwan Stock Exchange (TSEC). The result shows that the individual stocks are positively skewed. The positive skewness is more pronounced in stocks with low fraction of independent directors and low foreign ownership. We infer that managers possess more discretion in information disclosure under less external monitoring and this managerial discretion drives the stock returns to positive skewness.

Keywords: Discretionary-disclosure, Skewness, Stock returns