Voluntary disclosure when private information and disclosure costs are jointly determined

Jung Min Kim,Robert E Verrecchia,Daniel J Taylor

doi:10.1007/s11142-021-09601-z

Jung Min Kim, Robert E Verrecchia + Show 1 more

Open Access

https://doi.org/10.1007/s11142-021-09601-z

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Journal: Review of Accounting Studies	Publication Date: May 31, 2021
Citations: 14	License type: open-access

Affiliation: University of Pennsylvania

Abstract

Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

Highlights

There is considerable variation in the extent to which managers provide voluntary disclosure
To illustrate the breadth of the economic forces we study, and to minimize concern that any of our empirical findings are setting-specific, we test for unimodal voluntary disclosure in two distinct empirical settings––capital investments and major customers
Consistent with a unimodal relation, we find that average voluntary disclosure is monotonically increasing in the first three quintiles of capital expenditure (Capex), decreases in the 4th and 5th quintile

Summary

Introduction

There is considerable variation in the extent to which managers provide voluntary disclosure. Perhaps for this reason, a significant portion of the academic literature explores the determinants of managers’ disclosure decisions Extant theories in this literature tend to link managers’ disclosure decisions to two independent economic forces: the existence of an adverse selection problem (e.g., the manager’s private information) and the cost of ameliorating the problem (e.g., the proprietary costs associated with disclosure). These theories, in turn, provide the basis for a burgeoning number of empirical studies. Despite compelling intuition and unambiguous theoretical predictions, the literature commonly reports mixed results (Berger 2011). In this paper, we conjecture that much of the prior empirical literature reports mixed results for two reasons: (i) the assumption that disclosure costs are independent of the manager’s private information, and (ii) the focus on estimating linear relations

Results

Discussion

Conclusion