Self-Imposed Investment Rationing in Light of Discretionary Disclosures

28 Pages Posted: 20 Aug 2012

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Ning Gong

Deakin University; Financial Research Network (FIRN)

Ram Ramanan

SUNY at Binghamton - School of Management

Date Written: August 20, 2012

Abstract

The role of investment rationing by one party to discipline reporting of private information by another is well recognized. Formally, adverse selection models succinctly capture this effect via the crisp information rents vs. efficiency tradeoff. This paper takes a different slant to investment rationing by showing that production cuts can also be self-imposed: by scaling down his upfront investments, an entrepreneur can discipline his own subsequent aggressive reporting behavior. In particular, in this paper, a higher investment by an entrepreneur raises his stakes, magnifying his incentives to acquire and selectively disclose information in order to manipulate market price. Of course, the rational market is not fooled and responds by suitably discounting price. As a consequence, the upfront lowering of investment permits the entrepreneur to credibly signal to the market that he will limit his shenanigans thereby also limiting retaliatory market penalties.

Keywords: Investment rationing, disclosure

JEL Classification: Game theory, Non-cooperative games

Suggested Citation

Arya, Anil and Gong, Ning and Ramanan, Ram, Self-Imposed Investment Rationing in Light of Discretionary Disclosures (August 20, 2012). AAA 2013 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2132716 or http://dx.doi.org/10.2139/ssrn.2132716

Anil Arya

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ning Gong

Deakin University ( email )

Department of Finance
Faculty of Business and Law
Burwood, Victoria 3125
Australia
+61 3 9246 8492 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ram Ramanan (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

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