IMPACT OF FINANCIAL COMMUNICATION IN BUSINESS PERFORMANCES: AN EMPIRICAL STUDY OF THE MICROSOFT – SKYPE ACQUISITION CASE

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Cycle (D.M. 270/2004)

in AMMINISTRAZIONE, FINANZA E

CONTROLLO

Final Thesis

Impact of financial

communication in

business performances:

An empirical study of the Microsoft –

Skype acquisition case

Supervisor

Ch. Prof. Vladi Finotto

Graduand

Eleonora Trojetto

Matriculation Number 832295

Academic Year

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Ringraziamenti

Questa tesi rappresenta la fine del mio percorso educativo, la fine di un intenso ciclo della mia vita fatta di fatica, sacrificio, tenacia, costanza e coraggio. Tanto coraggio.

Vorrei dedicare questo lavoro a tutti coloro che hanno contribuito, attraverso diverse forme, alla realizzazione di questo elaborato. In particolare, vorrei ringraziare:

• Tutti i professori che mi hanno trasmesso interesse e passione per lo studio e le specifiche materie studiate: tra questi un ringraziamento speciale va alla mia relatrice e professoressa Alberta Di Giuli, a Luca Visconti e a Boris Durisin, i migliori professori avuti. • I professori di Cà Foscari Elisa Cavezzali e Ugo Rigoni per essere stati fonte di ispirazione

per questa tesi grazie ai loro insegnamenti, consigli e suggerimenti di materiali.

• L’Università Cà Foscari e l’ESCP per avermi tenuta sempre impegnata, anche se spesso stressata, e avermi dato l’opportunità di partecipare ad attività ed iniziative super arricchenti e per aver fatto in modo di mettermi costantemente alla prova con sfide apparentemente impossibili, riuscendo a tirar fuori il meglio di me.

• Gli amici e compagni di università per i momenti di svago e per il loro aiuto nella gestione degli impegni.

• A Lisa, Chiara, Beatrice, Rita, Matteo e Nicolò e a tutti i ragazzi internazionali del Double Degree per essere stati degli ottimi compagni di viaggio in questa esperienza.

• Ad Alessandro, per essere stata una costante dei miei ultimi sette anni, per essere stato al mio fianco in ogni momento e per avermi sempre aiutato e dato la forza di continuare a credere in me stessa anche quando pensavo di non potercela fare.

• E soprattutto ai miei genitori, che senza il loro aiuto e sostegno non avrei mai potuto essere chi e dove sono, e che mi hanno sempre cercato di aiutare e motivare in ogni

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I. Abstract:

Financial communication is a new science, which mixes the concepts related to the finance and marketing area. Is this new discipline so necessary in the enterprise’s world? Is this subject able to influence and determinate different business performances? Is this communication a fundamental aspect of value creation, leading to an improvement of revenues, a reduction of costs, a huge issuing of company’s shares, an enhancing stock price?

In this research thesis the relationship between the disclosure with the operational and market results will be examined firstly by analyzing a case study of firms involved in a circumstance of mergers and acquisitions and secondly by trying to identify positive or negative correlations between financial communication and performances.

The work, which is structured through a deep analysis of financial disclosure interactions and implications in the Microsoft-‐Skype acquisition case happened in 2011, evidences congruencies with qualitative and operational results, while the outcomes of the market analysis are fluctuating.

The aim of the research paper is trying to solve the quest for improving business performances related to financial disclosure in M&A contexts, which has not been much covered from the perspective of corporate and market implications, but which is essential to fill the gaps in non-‐optimal situations of the firm.

Keywords: disclosure, communication, M&A, performances, finance, stakeholders

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II. Résumé:

La communication financière est une science nouvelle, qui mélange les concepts typiques de la finance et du marketing. Est-‐ce que cette discipline nouvelle est nécessaire dans le monde de l’entreprise ? Est-‐ce que ce sujet est capable d’influencer et déterminer différentes performances du business ? Est-‐ce que cette communication est une aspecte fondamentale de la création du valeur, capable de guider vers une amélioration des revenues, une réduction des couts, une grande émission des actions de la société, un progrès qui regarde le prix des actions ?

En ce mémoire de recherche, la relation entre la communication et les résultats opérationnelles et du marché, sera examinée premièrement en analysant un cas des entreprises impliquées en circonstances de fusions et acquisitions et, deuxièmement, en essayant d’identifier une corrélation positive ou négative entre la communication financière et les performances.

Donc, ce travail, qui sera structuré à travers une analyse détaillée des interactions de la communication financière avec les implications dans le cas d’acquisition Microsoft-‐Skype du 2011, manifeste des congruences avec les résultats qualitatives et opérationnels et des conséquences fluctuants avec lesquels du marché.

Le but de ce mémoire de recherche est d’essayer de résoudre la quête pour des améliorations à niveau des performances du business liées à la communication financière. Cette typologie de quête n’a pas été beaucoup traitée à travers une perspective des implications d’entreprise et de marché, mais c’est essential pour remplir les gaps en situations non-‐optimales de l’entreprise.

Mots clés : divulgation, communication, M&A, performances, finance, stakeholders, acteurs

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III. INTRODUCTION: the importance of financial disclosure

Financial disclosure is a quite new science that mixes together notions of marketing and finance. A good development of this discipline within a company is a successful key point because it represents a fundamental tool through which the management can “sell” the image of the firm and the firm itself, in the sense that through specific disclosures, the enterprise can ask and influence the stakeholders coherently with its needs.

Indeed, the first objective of financial communication is that of creating practices aimed at obtaining trust and improving the management of the company. One of the most important factors that determine a good firm management is the creation of a process based on releasing disclosures concerning the economic and financial situation of the company’s activity. This is noteworthy because the fact of providing information to potential company’s supporters, gives the possibility to develop a system that incentivizes the productivity and the creation of economic added value.

The communication process makes possible the transformation of basic economic and financial data in pieces of information analysed through an analytic evaluation, whose aim is to understand the economic and financial situation of the company, the sectorial positioning of the society (useful to define the financial sustainability of the business model in the long term view), its strategic orientation and the forecasts compared to the expected results to boost the competitive differential.

Nevertheless, there are four specific areas of business communication. The commercial communication is the tool that the company uses to manage the relationships with the intermediate and final market’s customers in order to transform the potential customer in an effective and loyal one. The institutional communication that is aimed at creating qualitative relations between the company and the public, with which it is connected, has the goal of defining the business positioning (identity, values, projects) and positively influencing the stakeholders’ behaviour. The managerial communication refers to that process of creation and exchange of information/ideas for people directly and indirectly involved in the operating activity of the company. Thus, it becomes relevant to have a dynamic, organized and motivated firm, aimed at obtaining a competitive advantage that is difficult to replicate. Finally, the financial-‐economic communication is about the signalling of

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the evolution of the economic and financial values deriving from the operations of the whole company’s cycle management. It consists of all the communications released through every channel and every tool from the top management to the different categories of stakeholders.

Financial disclosure can be effectuated with different tools not only for letting the stakeholders know the activity and the value of the company, but also for making the market more efficient. However, the informative need is not the same for everybody because numerous sources of differentiation that influence the company’s disclosures exist: they could be the company’s size, the business operating sector, the history and the business culture, the evolution of the financial market.

Therefore, financial communication is a science that increases the amount of information available in the market, and that has effects in the creation of a business image and in the allocation of capitals, possibly following rules of efficacy and efficiency.

Through this paper, I want to focus my attention in the financial communication activity and in its interactions with the business and market performances in order to analyse the presence of possible dependencies from which both the company and the stakeholders can benefit. My field of analysis, however, is the mergers and acquisition context where the role of disclosure (quantitative and qualitative) between an acquirer and a target company can have other additional drivers and consequences.

More specifically, in the first chapter I will describe the implications of financial disclosure related to all the actors involved in the communication process and in terms of advantages and disadvantages for the company and the stakeholders.

In the second chapter I will analyse the positive and negative effects of financial communication in the market, with a special regard for the context of mergers and acquisitions.

Then, I will expose my research method to understand if the interactions existing in the M&A field between disclosures and performances hide relevant dependencies that can influence and be a prediction of the markets and stakeholders’ reactions. Additionally, another key point of this analysis is to comprehend if the influences of financial communications lead to better performances, in the sense that all the variables considered

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relevant in the research of connections are associated with a higher economic and market value of the companies.

The case through which I will discuss about these issues is a quite recent acquisition case happened in 2011 in the telecommunications and technology industry. Firms in these business sectors are more inclined to release disclosures related to the company, their aims and the acquisition process. Moreover, companies that belong to this field are of significant dimensions, facilitating an easier contact with millions of people. Actually, the case analysed is the Microsoft’s acquisition of Skype and it represents one of the major acquisitions of the sector, and for sure the biggest of Microsoft.

Thus I will analyse a series of variables in this acquisition case, dividing the findings in quantitative and qualitative.

In the fifth chapter I will draw my conclusions regarding the interactions between what companies communicate and improving performances in M&A cases of relevant size.

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IV. RESEARCH QUESTION

Financial communication is an emerging discipline that requires that companies should disclose its business situation and its aims through different tools. The choice of the channels that can be used regards the strategy and the habits of the company.

However, the fact of communicating, especially in a context of M&A, where all stakeholders are looking for information in order to act properly, can be voluntarily manipulated. The reasons behind these actions of alteration are for taking advantage of the problems of asymmetric information. In this way companies can show positive or negative results depending on the investor’s reactions in terms of confidence, courage, credibility and risk. Thus, a positive impact of financial disclosure is not automatically assured.

For this reason in this paper I will study if the communications released by companies involved in an acquisition transaction, and more in general, all the procedures of financial disclosure, are associated with a concept of improving performances. Additionally I will analyse the drivers of this improving/decreasing results, trying to identify some dependencies or independencies with the variables considered, which are divided in qualitative and quantitative.

Hence, from this study, I identify some correlations between company’s disclosures and business performances, which are separated in operating/corporate results and market ones.

The quest of connections between financial communication and better business outcomes is aimed at finding results that, even if there are always specific limitations for each case, can be generalised for every M&A transaction of a medium-‐big size.

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V. MOTIVATION

I decided to carry out a master thesis focused on the research field of financial communication and M&A for several reasons.

First of all, I started to be really interested in financial disclosure in a master course last year, because it let me think about all the implications that simple words and behaviours can have in the public.

Then, being a corporate finance master student, I find that M&A is the typical and most complete topic of finance because it represents the crucial moment of two companies that try to come out with something new by joining their knowledge and strengths.

Thus, I opted for a combination of the two different aspects of finance to understand if there are connections and concrete interactions between them.

Additionally, I chose the communications and technology as the key business sector of my work because I think it is one of the most innovative and reactive industries and thus companies belonging to those sectors are more inclined to adopt interesting behaviours present in the financial disclosure world. Then, I really love both communications and technologies because the resulting tools are so exciting means that I experimented several times in my periods of life, especially the ones far from home.

Moreover, I discovered that the theme regarding the impact of financial disclosure in market and business performances during and after a merger or an acquisition has never been treated sufficiently. This fact incentivized me to develop this topic and at the same to

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1. THE IMPLICATIONS OF FINANCIAL DISCLOSURE

1.1 Different forms and purposes of financial communication

Financial disclosure does not consist of simple information, but it is composed by a great variety of communications, related to the financial, strategic, operational situation of the company, which are inserted in a process where a sender, a recipient, a message and a communication channel are present. All these “functions” let communication be considered in a procedure where it can be transmitted, influenced and subjected to problems or distortions.

Specifically, according to Healey and Palepu (2001), these communications are inserted in a specific part of the communication process. Indeed, all the information provided directly by the company or indirectly by some intermediaries of it, are aimed to reach household savings and other typologies of investors that will or will not insert capitals in the process (directly or indirectly through financial intermediaries) depending on the quality and typology of disclosure, as represented in the figure below (Fig. 1).

Fig 1: outline of the information and capital process (Healy and Palepu, 2001) Household

savings

Financial

intermediaries Information intermediaries

Business firm

Flow of information Flow of capital

Regulators of capital markets and financial institutions Auditors and Accounting Regulators

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The reasons why this new science is always more relevant, are linked to the

satisfaction of strategic and tactic aims. First of all, the release of communications is

associated with the idea that all recipients should have the same amount and quality of information needed to know the company’s position and the framework where it operates. These notions permit all the recipients of the message, to clearly understand the information provided and to act on the basis of each own position and role for the achievement of personal and/or business interests. Indeed, the fact of being transparent and disclosing in high quantity is a benefit due that “information asymmetry reduction provides a rationale for efficient disclosure choice; in this sense it may be the natural progeny of early efficiency work in accounting that attempted to find sufficient conditions for disclosure” (R. Verrecchia, 2001).

Moreover, the necessity of making attractive the shares of the company and improving the image and business reputation leading to a higher credibility and borrowing capacity are the most important incentives of communication. In fact, the securities’ attractiveness is provided thanks to an exhaustive disclosure whose efforts are aimed at reducing the stock undervaluation and enhancing the company profitability (Jiao, 2011).

More specifically, objectives related to the enhancement of the company credibility, reductions of the incomprehension level, achievement of trust by employees and creditors, attraction of people or institutions focused in a fund provision activity, are typical for all kind of companies. On the other hand, goals of maintenance of attractiveness of the company’s stocks, the increase of the price and the volume of shares traded, facilitation of an IPO, are typical of only listed companies.

Therefore, according with the disclosure literature, the main purposes of financial communication are those of guaranteeing equity in the sense that all people is enabled to know the company’s disclosures and so to act properly, and efficiency in the sense that the pieces of information become a sort of public good which are “traded” with the intention of reducing the imperfections of the market (Healy and Palepu, 2001). Additionally, it improves the effects on the management of the firm because of major information (Mazitti, 2007). The disclosure’s forms and modalities are increasing and always better developed. Financial communication is divided in two categories:

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• Mandatory: it consists of all the documentation needed to have an exhaustive knowledge regarding the company and its situation. It is divided in starting communications needed when a company wants to be listed, the periodic communications which include all the balance sheets, financial statements, relations and reports related, the sporadic disclosures that are about management changes like M&A and “atypical” communications which are related to relevant and unexpected events that should be transmitted (these “atypical” communications are those that have an impact on stock prices and that are connected with the concept of business efficiency). Law demands this kind of disclosure; however, according to Balakrishnan et al. (2014), mandatory communication helps the creation of further disclosure because the fact of providing compulsory reports enhances the credibility and attractiveness of the voluntary one.1

• Voluntary: it consists of all kinds of information, which contribute to the creation of a clearer and closer relationship with the stakeholders of the company and at the same time to enlarge the group of the target people. The forms in which it is shown are public relations, mass-‐media relations, roadshow, lobbying, institutional and financial advertisement activities.2

The SEC3_{traditionally
limited
this
kind
of
disclosure
because
all
pieces
of
information}

which used forward-‐looking statements, were non verifiable and not credible as a consequence of several suspects of aimed management manipulations; then the situation progressively changed because voluntary communication gained more importance in terms of influence in the business performances to such an extent that a manager is incentivized to release truthful disclosures because of the relevance of the credibility issue (Stocken, 2000).

Furthermore, the activity of providing financial communications is linked also to an intertemporal matter. It means that the modality through which companies disclose is influenced by previous business behaviours held and it will have an impact on future strategic communicative attitudes. It signifies that “by augmenting the market's

1_{The
provision
of
credibility
to
voluntary
communication
by
the
mandatory
one
is
due
to
the
fact
of
not
being}

compulsory, because “in absence of a mechanism to enforce verifiability, voluntary disclosure is not credible and therefore is ignored by investors” (Balakrishnan et al. 2014).

2_{Also
the
preparation
of
a
social
and
an
environmental
balance
sheet
is
part
of
the
voluntary
disclosure}

because it embraces the discretionary corporate social responsibility topic.

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awareness of the existence of information, voluntary disclosure generate an implicit commitment on the part of the firm to provide similar disclosures in the future” (Einhorn and Ziv, 2007). According still to Einhorn and Ziv (2007), this evidence is negatively correlated with the managerial inclination to communicate because all the disclosures, being costly, influence the managers to not provide any voluntary information, even if he or she is interested in maximizing the value of the stock price in the market.4

Nevertheless, the border between mandatory and voluntary disclosure is not so marked as a consequence of the globalised markets and the slight practical differences between the two communications; indeed, with the new trend era full of transactions between several different countries, there is an increasing need of information.5

Additionally, there are other reasons, which determined a sort of indifference between the two kinds of disclosure: in fact, some information should be released as a reaction, as a clarification due to the presence of “rumours” or simply to modify the content of news already disclosed or to make some changes, if needed, to the variations already forecasted.6 All these situations need an explanation, a communication able to explain what happened; this consideration, progressively becomes always more well-‐found, to such an extent that the two typologies of disclosure (mandatory and voluntary) has to be taken in account together because one is necessary to comprehend the other with the related strategies (Einhorn, 2005).

However, the forms of communication can be distinguished in other two sectors: the one that belongs to the implicit disclosure and the other that belongs to the explicit one. More specifically, the first type mentioned, represents all the signals and gestures that are used to communicate. This communication through certain behaviours (e.g.: the

4_{This
outcome
is
valuable
especially
in
cases
where
there
is
no
disclosure
provided
voluntarily,
the
business}

environment is “safe” enough and when managers are not favourable in taking a high level of risk.

5_{In
this
framework
where
communication
is
necessary,
a
lack
of
disclosure
was
assimilated
with
negative
news.}

For this reason, an agent who anticipates a future negative result is better paid than one who predicts a positive one; in this context is emerging the concept of avoiding “more” negative outcomes by foreseeing them in advance (Levitt and Snyder, 1997).

Nevertheless, managers that disclose bad news could have some advantages because they have a greater reaction in the market, it is more difficult that plaintiffs denounce a lack of bad news and then, “firms whose managers acquire a reputation for failing to disclose bad news are less likely to be followed by analysts and money managers, thus reducing the price and/or liquidity of their firms' stocks” (Skinner, 1994).

6_{Other
“drivers”
of
voluntary
disclosure
are
the
increasing
role
of
financial
markets,
social
factors
in
favour
of}

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sustainment of some investments or the distribution of higher dividends) enables the investors, and the stakeholders in general, to make personal interpretations of these implicit signals, which express some pieces of information, in their way.

Effectively, the presence of signals helps investors to make choices regarding the firm because if they are quality ones (like the willingness of managers to invest in the firm for which they work) can lead these people investing their money in that company, thanks to their “actions” which are indirectly a source of disclosure (Leland and Pyle, 1977). 7

On the other hand, the explicit disclosure consists of a verbal release of information through many communication channels, which can be direct or indirect. In the direct ones interactions between the sender and the recipient of the information are possible.

1.2 The actors involved

In the financial communication process, many plaintiffs are included and each of them has a specific role in terms of importance, credibility, reliability and action.

The main actors involved in the disclosure procedure, are divided into senders, suppliers and recipients. The following actors compose the first group:

• Top management of the company: it is one of the most relevant actors of the process because the way in which it discloses is a sign of the corporate culture and values. Top management can communicate in an authoritative manner without letting the stakeholders have the possibility of expressing their opinions; in a manipulative mode when the company wants to stress only the good news, by hiding the bad ones only for influencing purposes; in an antagonist way when the vertex chooses to boost its company and its interest by weakening the communications of its main competitors; transparently when firms disclose coherently with its situation and environment, thus achieving the stakeholders’ support. 8

More specifically, the CEO is responsible for the organization of the company and thus, he should be in charge of communicating the corporate projects and disclosing the instruments, the culture, the technologies to the press and/or the financial community.

7_{As
a
continuation
of
Leland
and
Pyle
work
(1977),
it
has
been
supported
that
a
second
signal
should
be
used}

to communicate the company’s value and “the two signals, disclosure and firm ownership, are related through their cost structures, and are chosen simultaneously to minimize the cost of signalling value” (Hughes, 1985).

8_{The
company
should
use
the
appropriate
behaviour
depending
on
the
phase
in
which
the
company
is}

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The other relevant figure is the CFO, who is responsible of releasing information regarding the cash flows, the dividend policy, the investments and its related risks and benefits; moreover, he should also look for financing sources as well as providing news about the financial status of the company. In order to make communications more “attractive” for the stakeholders, SEC required some obligations whose aim is to “ensure greater participation by CEOs and CFOs in the creation of the company’s quarterly and annual reports and to restore investor confidence in the periodic disclosure of public companies” (Morrison & Foerster LLP, 2002). However, further studies found that the appropriateness’ certification of CEO and CFO’s statements increased the reliability of companies, which did not certify any voluntary disclosure (Vermeer, 2005).

• Investor Relator and external agencies: this figure9 is inserted in the Investor relations department of a company of medium and big size, and it has to treat equally all the stakeholders and at the same provide them communications that are useful to boost their credibility in the company as well as the liquidity in the market. Indeed, according to Laskin (2009), IR activity mixes business and communication notions to enable a competitive advantage that is able to increase the valuation of the company’s shares because of a greater trust. However, because of the preferred position of this role, investor relators are not allowed to carry out activities of insider trading.10

Nevertheless, the Investor Relators have the support of external experts like auditors and accountants whose aim is to help them ensuring an efficient financial disclosure activity. Precisely, agencies are responsible of controlling the quality of the analysis executed and the vocabulary used to be “attractive”, moreover they are responsible of managing instruments like newsletters and mailing lists; on the other hand auditors verify the reliability of the corporate disclosures based on the balance sheets and financial statements. However this “accuracy” of auditors has been contested because of some evidences which prove that they confirm at most the information already available to investors (Healy and Palepu, 2001): the main causes of this attitude are that auditors

9_{NIRI
(acronym
of
National
Investor
Relations
Institute)
defines
IR
activity
as
a
“strategic
management}

responsibility that is capable of integrating finance, communication, marketing and securities law compliance to enable the most effective two-‐way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation” (NIRI, Board of Directors, 2003).

10_{Insider
trading
activities
are
linked
with
the
fact
of
taking
advantages
of
the
exclusivity
of
the}

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want to minimize their risk (even if they decrease the value of disclosures) instead of boosting the credibility of reports; they strongly believe only in the final annual report being unable to predict in time possible unexpected signals; they basically act in the interest of who hires them and not of the company’s stakeholders. Anyway, these findings has been expanded, wondering if there are some differences in terms of more credibility due to the fact that many audit companies have spun off their advisory branch.

The second group of actors is the one related to the suppliers: they basically are the

communication channels through which all the news reach the interested recipients in the

direct ones or find other intermediaries who collaborate in the indirect ones. In the first sub-‐ group mentioned interactions and feedbacks are immediately made through tools as conference calls, web streaming live, company’s presentation that is going to be listed (roadshow). Here is possible to listen the “customers”’ voice, useful to understand what to improve in financial disclosure. In the second sub-‐group the attention is focused on the figure of the intermediaries that are external actors that with their skills try to enhance the value of communication.11_{All
these
communications
can
be
conserved
in
specific
websites}

and/or databases and have the advantage of the possibility of being read and analysed in detail many times.

The third group of plaintiffs are the recipients of the disclosure and they can be subdivided as follow:

• Shareholders: they represent the investors of the company and thus they want to know all the risks and benefits that they should deal with.

• Funds provider and financial intermediaries: this category gives money to the company to accomplish their projects but this lending is subject to a detailed overview of the firm and especially its strategic business plan with related risks and capabilities of refund the money anticipated. A particular category of financial intermediaries are the financial analysts: they provide a derivative disclosure because they elaborate again the news available to check the sources, the reliability and content in order to improve the communication system and to support the Investor Relators. This role analyses the

11_{In
the
majority
of
the
cases,
the
intermediaries
use
Internet
as
channel
and
tool
of
spread
of
the}

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situation in which the company is situated and tries to create a better positioning in the market.12_{According
to
Healy
and
Palepu
(2001),
the
financial
intermediaries
create
value}

for the company through their communications and the related market reactions, but there are some doubts regarding the incentives and the credibility of these actors. Indeed, these plaintiffs (in particular the financial analysts) have a key role in guaranteeing market efficiency and a certain accuracy in their well-‐timed communications. Nevertheless, this degree of correctness does not depend on their experience but on their personal abilities or affiliations to brokerage houses; in addition there are some evidences that the forecasts of financial analysts are voluntarily optimistic because they can benefit of monetary incentives based on the volume of the stocks traded. The forecasting information can be of numerical nature or more often “greatly influenced by forward-‐looking statements made by management, strategy-‐ related news flow, and non-‐company-‐specific information relating to the covered firm’s operating environment” (Kerl et al., 2012).

• Rating agencies: these societies are responsible of evaluating the probability of default of companies as a consequence of the analysis of its data disclosed.13 Then, they grade the firm through classifications, which label the company in terms of reputation and risk, which is really relevant information for investors. The contribution of this actor in the communication process is fundamental because according to Heflin et al. (2011), some company’s disclosures (e.g.: annual reports) are considered more reliable and of better quality when rating agencies better rank these firms; at the same time this boost in perceived quality is connected with enhancements in credit ratings.

• Employees: they are the stakeholders that belong to the company and thus they need information and detailed disclosure in order to know and stabilise a transparent relationship with the firm that communicates news related to the business performances and its strategies.

1212_{The
most
important
condition
to
promise
an
efficient
report
is
the
fact
of
having
an
amount
of
past}

information as precise, correct and complete as possible in order to minimize the risk of disclosing risks, incorrect or not future adapted data. However “past trends and present status, as modified by particular circumstances, are the starting points for projections of the future” (Norby and Stone, 1972).

13_{In
this
context,
is
important
to
specify
the
relevance
of
creditworthiness
in
being
solvable,
valued
feature
for}

investors because sign of financial health and stability. Evaluating the company’s rating. Creditworthiness, however, is well “calculated” and represented with these ratings provided by experts (Heflin et al, 2011).

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• Suppliers: this group as all the other company’s stakeholders should know all the firm’s communication with the purpose of adapting the product with its needs, but, it will be completely transparent with difficulty because there could be damages of a weakness position.14_{Then,
when
the
relationship
has
been
validated,
the
company
is
obliged
to
be}

limpid if they want to continue to benefit of this connection, otherwise suppliers will not be favourable of being linked with a company that have liquidity problems (disclosed or not).

• Customers: communication is fundamental to achieve the aim of a successful customer relationship management.

• Specialized mass media: as a consequence of all the disclosures released, also this actor of the process should update the news in order to be ready for possible questions and/or interactions.

Therefore all the actors of the communication process should behave in a transparent manner with each other in order to create a clear, truthful and credible disclosure procedure in the market, which is developed as synthetically reported in the following outline (Fig. 2).

Fig. 2: process of financial disclosure and the actors involved in it

14_{In
this
context
is
relevant
to
highlight
the
contribution
of
Arya
and
Mittendorf
(2011)
that
analyse
the}

relationship between disclosure and suppliers. Specifically, the supplier can modify and manage the price depending on the communications provided. Moreover, disclosure is a competitive factor for multi-‐brand suppliers, enhancing also the knowledge level of consumers.

Company

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1.3 Advantages from the point of view of stakeholders and business

The act of disclosing information regarding the company or the business environment in which is included, leads to several advantages for the stakeholders and also for the firm. First of all, the fact of communicating involves the mention of series of previous studies and researches, which imply lower production costs of communication. It is possible because many investigations have already been carried out for different reasons (e.g.: to understand the consumers’ needs, to improve the development strategy of a product, etc.) and this facilitates disclosure’s cost-‐effectiveness because of the collection of precious information for previous purposes. There are also some advantages due to the decrease of judicial costs: thus, thanks to a reliable and transparent communication, the company is less exposed to judicial causes (which can be due to a lack of information) and their huge costs related (Skinner, 1994). The same concept is applicable to the sanction costs,15 which do not exist in case of release of the disclosures required by law (at least, for the mandatory one).

Additionally, the enhancements in reputation and business image are other benefits that derive from a major communication. Indeed a company, which is open to explain all its data and projects (with annexed problems and risks), is positively considered, from a stakeholders’ point of view. It is an important factor because this positive association with the company leads to a reduction of the uncertainty and an empowerment of the communication’s credibility. Moreover, reputation is one important driver of disclosure and the level of commitment to stakeholders and the degree of media visibility of the firm measures it (Michelon 2011). It is possible because through media tools, all the stakeholders are able to judge the company’s activities and communications.16

15_{Costs
applicable
when
false
communications
are
disclosed.}

16_{One
cause
really
important
that
enhances
the
degree
of
company’s
reputation
is
the
involvement
of
the
firm}

in sustainable activities or in corporate social responsibility topics.

However, the role of reputation in the relationship between managers and investors is really crucial because

one (the managers) tries to create and develop a certain valued image of its activities and disclosures, while the other (the investors) are ready to judge, evaluate and have confidence in the reputations they attempted to develop. Therefore, “managers can enhance or exploit their reputation for being forthcoming over time through their disclosure choices, and investors price firms with the understanding that the firms’ managers attempt to manage investors’ perceptions of their reputations” (Beyer and Dye, 2012).