Reputation Effects of Information Sharing
40 Pages Posted: 19 Nov 2009 Last revised: 20 Nov 2016
Date Written: August 8, 2016
This paper analyzes a model of investment and return in an economy characterized by information asymmetry between an investor and a manager. The realized value of the uncertain state of nature is the manager’s private information. The paper first considers an economy where the manager cannot share her private information with the investor. Therefore, dividend payment is the only reputation building tool available to the manager. If the investor’s prior beliefs about the manager’s trustworthiness are sufficiently high, then the manager will return a dividend consistent with the lower possible state of nature having occurred and the investor will revise such beliefs downwards. However, if the beliefs are not so high, then the equilibrium will be mixed strategies.
The paper then compares such a dividend-only economy with one where information sharing is an additional tool available for building reputation. Information sharing disciplines the potential opportunism accruing to a manager out of her informational advantage. It provides ex post verifiability of the state of nature and thereby, obviates downward revision of an investor’s prior beliefs about a manager’s trustworthiness. This results in a greater region of pure strategy play in the dividend-and-information-sharing economy. Since such pure strategy play implies investment with certainty, information sharing leads to higher investment. Further, pure strategy play implies returns consistent with the actual state of nature in the dividend-and-information-sharing economy while it implies dividend consistent with the lower state of nature in the dividend-only economy and these lead to higher return in information sharing.
Keywords: Disclosure, Reputation, Trust
JEL Classification: M41, D82
Suggested Citation: Suggested Citation