WORKING PAPERS AND WORK-IN-PROGRESS:
Revising for resubmission, 2nd round
The aim of general purpose financial reporting is to provide information that is useful to investors, lenders, and other creditors. With this goal, regulators have tended to mandate increased disclosure. We show that increased mandatory disclosure can weaken a firm's incentive to acquire and voluntarily disclose information. Specifically, we provide conditions under which a regulator, seeking to maximize the total amount of information provided to investors via both mandatory and voluntary disclosures, would impose an imperfectly informative mandatory reporting regime even when a perfectly informative regime entails no direct costs. The results contribute to our understanding of potential interactions between mandatory reporting and voluntary disclosure, and demonstrate a novel benefit of accounting standards that mandate imperfectly informative reports.
With Robert Gox
Revising for resubmission, 2nd round
We study how a firm owner motivates a manager to create value by optimally designing an information system and a compensation contract based on a manipulable performance measure. In equilibrium, the firm either implements a perfect or an uninformative system. The information system and the pay-performance sensitivity (PPS) of the compensation contract can be substitutes in a sense that the firm optimally combines a perfect information system with a low PPS or an uninformative system with a high PPS. Because the information design is endogenous, firms facing relatively high manipulation threat may offer financial incentives that are higher-powered than the ones offered by their peers facing lower manipulation threat. If the manager is in charge of implementing the information system, he chooses a perfect one unless the firm uses the information for internal control. The firm may prefer to commit to an internal control level before observing any information.
Corporate Disclosure in the Presence of Media Coverage
With Elyashiv Wiedman
Does media coverage crowd in or crowd out corporate disclosures? We examine a model in which a firm manager may be endowed with private information about the value of a project. The manager can voluntarily disclose this information to investors who also have access to a news report with potentially inaccurate value-relevant information. We illustrate that the beliefs of the investors about the manager's information endowment are endogenously reinforced by their beliefs about the news accuracy. Because of this "reinforcement effect," media coverage crowds out corporate disclosures. After the news report becomes publicly available, the manager may respond with a disclosure of (seemingly) unfavorable information and withhold favorable one. We predict that journalists prefer to receive inaccurate information with positive probability and to delay the release of news reporting low values. Our results may explain drops in stock prices following good news.
Antagonists, Experts, or Both? Board Composition when Inattentive Boards are Persuaded
With Martin Gregor
We analyze a model in which a CEO communicates information about a project to an antagonistic board of directors. The board decides whether and how much additional information to collect before approving or rejecting the project. We find that the CEO designs an imperfectly precise public signal that discourages the board from gathering additional private information. We find that the CEO's option to communicate, in a cheap talk, any subsequently received private information does not change the optimal design of the public signal. If designing a public signal is costly and the conflict of interest between the CEO and the board is relatively weak, the CEO prefers to communicate only via cheap talk. However, if the conflict is relatively strong, commitment to an imperfectly informative public signal is optimal. We show that the board's expertise and antagonism are substitutes in reducing the project approval error and predict that, in industries with higher information acquisition costs (e.g., new industries), shareholders appoint more antagonistic boards to substitute for the board's lack of expertise.
Synergies, Collusion and Pay Compression
With Tim Baldenius
Investment Inefficiency With Capital Market Competition and Endogenous Information
Strategic Skepticism and Information Extraction
With Matthew Bloomfield