Optimal Disclosure Policy Research Articles

Information Quality and Correlated Signals

This paper investigates the trade-off between relevant and reliable accounting information in the context of the argument about accounting. The usual argument in accounting characterizes fair values of assets as being more relevant but less reliable than their historical costs, with fair value being ultimately more informative only if its increased relevance outweighs its reduced reliability (e.g., see Searfoss and Weiss [1990]). Current models of financial disclosure ignore the issue of reliability versus relevance, either because a single signal is assumed or because the distinction is not made explicit. By explicitly distinguishing relevance from reliability in a two-signal model, this paper addresses this omission. Representing accounting information as signals about asset value, I examine optimal disclosure policy when two signals are available to be disclosed, neither of which is a sufficient statistic for the other. Reliability is modeled as the precision of these signals while relevance is modeled as

Disagreements among Shareholders over a Firm's Disclosure Policy

ABSTRACTThis paper examines the issue of voluntary disclosure of information by firms with heterogeneous shareholders. It shows that in a rational expectations setting, better informed shareholders prefer less disclosure than less well‐informed shareholders. This is due to differences in the adverse risk‐sharing effect and the beneficial cost‐saving effect of disclosure among shareholders with different risk tolerances and information acquisition cost functions. The presence of individual liquidity shocks is shown to reduce shareholder disagreements regarding a firm's disclosure policy.