Bentham's Panopticon and Real Effects of Voluntary Disclosure

Abstract

This paper examines voluntary disclosure of nonproprietary information where the manager is uncertain about the market’s reaction to disclosure. In particular, we consider situations where a manager is uncertain about whether her decision to withhold private information is either directly observed or only considered possible by investors. We show that adding the possibility that investors identify deliberate non-disclosure increases voluntary disclosures by managers – a finding which is reminiscent of Bentham’s Panopticon. We show that voluntary disclosure increases in the probability that managers assign to the case of being identified as non-disclosers and that this result is the outcome of two opposing effects. Finally, we show that when the manager uses her private information for a publicly observable production decision she has ex ante incentives to make her non-disclosure decision identifiable. This counterintuitive result occurs because informed investors serve as a commitment device for managers to produce efficiently ex post.