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 principal is concerned with stock market valuation and agent misappropriation, this paper endogenizes when she retains ex post disclosure discretion and when she curtails her discretion, opting instead to ex ante committing to not gathering information or publicly disclosing information. The underlying economic forces entail a tradeoff between the time-inconsistency problem (the principal’s ex post preferences can diverge from her ex ante goals) and how silence (absence of information) under the ex ante and ex post paths is valued differentially by the agent. In effect, silence under different systems “speaks” differently, and this changes the agent’s incentives to misappropriate and the market’s pricing of the firm’s stock.