Contingent Choice Behavioral Models in the Presence of Information Uncertainty

Posted: 21 Jun 2011

See all articles by Stephen J. Dempsey

Stephen J. Dempsey

University of Vermont - School of Business Administration

David M. Harrison

UCF; Texas Tech University

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate

Michael Seiler

College of William and Mary - Finance

Date Written: June 20, 2011

Abstract

Recent literature suggests that enhancing the quantity and/or quality of corporate disclosures may influence the non-diversifiable component of information risk for the firm, and hence, have non-trivial valuation implications. We propose a framework that argues a firm’s disclosure level balances the potential cost of capital benefits from selective revelation and the disutility of distress, which in turn is a function of the potential costs of obfuscation. The REIT industry provides an experimentally appropriate backdrop for our position due to its generally heavy reliance on external financing and thus its heightened market exposure to priced information risk. Using three potential measures of the opacity of a REIT’s annual report: the Flesch-Kincaid Grade Level, the Flesch Reading Ease Score, and the number of words contained in the report, we propose that capital constrained firms, particularly those with growth ambitions, should be uniquely sensitive to the transparency of their corporate disclosures as opacity materially influences the firm’s cost of capital.

Suggested Citation

Dempsey, Stephen J. and Harrison, David M. and Luchtenberg, Kimberly F. and Seiler, Michael, Contingent Choice Behavioral Models in the Presence of Information Uncertainty (June 20, 2011). Journal of Real Estate Portfolio Management, Vol. 16, No. 3, 2010. Available at SSRN: https://ssrn.com/abstract=1868592

Stephen J. Dempsey

University of Vermont - School of Business Administration ( email )

Burlington, VT 05405
United States
802-656-8322 (Phone)
802-656-8279 (Fax)

David M. Harrison

UCF ( email )

Orlando, FL 32816-1400
United States
407-823-1127 (Phone)

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Kimberly F. Luchtenberg

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

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