Endogenizing Discretion in Disclosures

Abstract

A firm’s publicly available information reflects ex ante committed information releases and ex post discretionary disclosures. In a setting wherein a firm’s CEO is concerned with stock market valuation and confrontations with the employee union, this paper endogenizes when the CEO retains ex post disclosure discretion and when the CEO curtails discretion, opting instead to ex ante commit to not gathering information or publicly disclosing information. The underlying economic forces entail a trade-off between the time-inconsistency problem (the CEO’s ex post preferences can diverge from the CEO’s ex ante goals) and how silence (absence of information) under the ex ante and ex post paths is valued differentially by the union. In effect, silence under different systems “speaks” differently, and this influences both the labor union’s incentives to engage in bargaining with the firm and the stock market’s pricing of the firm’s equity. This paper was accepted by Ranjani Krishnan, accounting.