(Solo-Authored)
This study explores how a firm's internal information environment affects a manager's decision to voluntarily disclose information to investors. It presents a model where the probability that a manager has information depends on whether the information is favorable or unfavorable. In the model, an internal information environment is defined as conservative (aggressive) if it is more (less) likely to inform the manager about negative outcomes. The study shows that conservative internal information environments decrease voluntary disclosure. Additionally, in conservative (aggressive) internal information environments, an increase in information asymmetry between a manager and investors leads to less (more) voluntary disclosure. This finding illuminates how the firm's internal and external information environments interact to determine the extent of voluntary disclosure and is thus of empirical relevance.
Research Grants: Bernstein Center Doctoral Research Grant.
Coverage: University of Oxford Business Law Blog
With Sang Wu.
This paper examines the role of reputational incentives in communication games when the decision maker can acquire additional information besides the advisor's message. We find that the decision maker is more likely to acquire additional information in the future when the advisor is perceived as misaligned. While both aligned and misaligned advisors value reputation to the extent it increases their trustworthiness in the future, they have opposite preferences regarding the informedness of the decision maker. As a result, conditional information acquisition leads to enhanced communication informativeness. In particular, the aligned advisor is incentivized to "deceive" the decision maker about her type by actually telling the truth in order to induce more information acquisition. The misaligned advisor, on the other hand, tells the truth more often since conditional information acquisition serves as an additional disciplining device.
With Tim Baldenius.
The decision of agents to engage in economic activity is shaped by the information they possess and the incentives they face. The joint provision of information and incentives becomes more complex when there is a need for coordination. We study a setting in which a principal contracts with two agents, who provide complementary efforts. The principal has private information about each agent's respective productivity and can disclose it. Taking contracts first as given, we show that the principal may want to withhold information for sufficiently strong productive synergies. Keeping the agents in the dark about their individual productivity leads them to exert balanced efforts, taking maximum advantage of the complementarity. If the principal chooses the agents' contracts endogenously, this introduces another instrument for coordinating their efforts. We show that the incentive to withhold information diminishes with endogenous contracts, but it does not disappear. Moreover, the relation between input complementarity and disclosure can become nonmonotonic: the principal may disclose for efforts that are largely independent or strongly synergistic, yet withhold information for intermediate levels of complementarity. Overall, we find contracting and disclosure to be complements, rather than substitutes, in coordinating agents' effort inputs.
With Yasmin Hoffmann and Qian Zhang.
We examine a dynamic disclosure model where a manager interacts with a representative investor who exhibits loss aversion under Prospect Theory. A key focus of our analysis is the timing of disclosure decisions in response to biased capital markets. We find that when facing such bias, the manager will disclose moderately bad news more promptly to dampen the negative price effect resulting from loss aversion, even if that means foregoing a higher nondisclosure price. This contrasts with previous findings of delayed disclosure in models with pending news and suggests that conservatism in financial reporting, defined as the asymmetry in the timeliness of disclosing good versus bad news, can arise endogenously as an optimal strategy. Empirically, we investigate how loss aversion influences disclosure timing using analyst forecasts and price target revisions. We find that firms facing higher loss aversion issue management guidance more frequently and release bad news more promptly. Furthermore, we document that preemptive disclosure mitigates negative market response to bad news in the presence of prospect-theoretic markets. Our findings offer new insights into capital market effects of conservative reporting and the strategic timing of disclosures, adding to the literature on the behavioral foundations of financial reporting.