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Do Managers Voluntarily Disclose to Guide Themselves Through Policy Uncertainty? A Managerial Learning Perspective

We examine whether economic policy uncertainty (EPU) encourages managers to issue voluntary disclosures to facilitate learning from stock prices regarding investment decisions. We find that EPU is positively associated with subsequent capital expenditure (capex) forecast issuance. Consistent with a learning channel, we find that this relation is pronounced when potential investments are irreversible, when managers are less informed regarding potential policy changes, and in the presence of politically-connected institutional ownership in the firm’s equity. We also find our results are robust to addressing omitted variable bias when using the 2016 presidential election and the 2018-19 U.S.–China trade dispute as shocks to specific sources of policy uncertainty. Further consistent with managers learning from price reactions, we find that realized capital expenditures are significantly adjusted in the direction of market reactions to capex forecasts, particularly during periods of elevated EPU, and that these market-related capital expenditure adjustments are positively associated with future firm performance. Finally, we provide evidence that the effect of EPU on capex forecasts appears distinct from an information asymmetry channel through which prior studies link voluntary disclosures to policy uncertainty. Overall, we document managerial learning as a novel voluntary disclosure incentive in response to policy uncertainty.