Continuing the interpretation of the null discussion! Last day was interpreting the null when one found a reaction to a disclosure. Today, the opposite.

Case 2. Managers do not react in real operations to a information disclosure that they knew but is new information to the market. You predict managers would react to the disclosure, but you found they did not. In other words you cannot reject the null. Beyond the danger of interpreting any null result, let’s ensure we understand the null hypothesis fully.

Embedded in the null is that the disclosure does not affect managers decisions. But there is more! Also embedded in the null is that the required disclosure was too vague, too hidden, too new to affect managers decisions. In other words the regulation did not really focus attention of either third parties or the managers themselves of the fact new information to the market is being disclosed.

That is, all disclosures are not created equal ( I thought we were well beyond the naive EMH world where any public disclosure of information no matter how vague and obscure must affect decisions due to market magic!). Hence another interpretation of the null is that nothing happened due to too weak of a disclosure regulation so that managers feel no difference in accountability due to the vague or hidden disclosure.

In both cases the policy prescriptions differ depending how you interpret the null. In last post’s Case 1, misunderstanding the null could cause you to recommend disclosure must happen or managers would not use the new information. Maybe they would not, but maybe they would. In Case 2, you could conclude disclosure is not effective, so get rid of the disclosure. But you cannot rule out that the regulatory invention was too weak , vague or unclear in it current form but higher quality disclosure could change managers actions. Hence, the another solution is more effective disclosure. The opposite of the first null conclusion! And again as in case 1, the researcher cannot tell the difference!