Acquisition and Disclosure of Operational Information
Decision Sciences, Vol 43, Issue 3, 459-487
Posted: 17 Nov 2009 Last revised: 8 Jul 2012
Date Written: August 26, 2011
We study a firm’s strategy for acquisition and disclosure of operational information by establishing linkages among information quality, managerial self-interest, and production planning. We develop a multi-stage model in which a manager of a publicly traded firm first receives private information about the product demand and then uses it to make production and disclosure decisions. We consider two prevalent disclosure models employed in the accounting literature: all-or-nothing and cheap-talk models. In the all-or-nothing model, it is assumed that any disclosure must be truthful, but the manager can strategically withhold information. We show that the manager commits to acquire the value-added operational information if i) the managerial self-interest in the interim share price is low or ii) the managerial self-interest in the interim share price is high, but the fixed disclosure cost is either sufficiently low or sufficiently high. We demonstrate that the firm is better off if the production level is observable to the financial market because multi-dimensional signaling reduces costs. In the cheap-talk model, the quality of the disclosure is endogenous. We prove that the equilibrium is a partitioning equilibrium and demonstrate that the manager’s incentive to acquire value-added operational information is increasing in the penalty cost for misleading investors.
Keywords: Discretionary disclosure, Interface between accounting and operations
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