The Real Costs of Disclosure

48 Pages Posted: 9 Sep 2013

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department

Chong Huang

University of California, Irvine - Paul Merage School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 2013

Abstract

This paper models the effect of disclosure on real investment. We show that, even if the act of disclosure is costless, a high-disclosure policy can be costly. Some information ("soft") cannot be disclosed. Increased disclosure of "hard" information augments absolute information and reduces the cost of capital. However, by distorting the relative amounts of hard and soft information, increased disclosure induces the manager to improve hard information at the expense of soft, e.g. by cutting investment. Investment depends on asset pricing variables such as investors' liquidity shocks; disclosure depends (non-monotonically) on corporate finance variables such as growth opportunities and the manager's horizon. Even if a low disclosure policy is optimal to induce investment, the manager may be unable to commit to it. If hard information turns out to be good, he will disclose it regardless of the preannounced policy. Government intervention to cap disclosure can create value, in contrast to common calls to increase disclosure.

Keywords: cost of capital., Disclosure, financial and real efficiency, investment, managerial myopia

JEL Classification: G18, G31

Suggested Citation

Edmans, Alex and Heinle, Mirko Stanislav and Huang, Chong, The Real Costs of Disclosure (September 2013). CEPR Discussion Paper No. DP9637. Available at SSRN: https://ssrn.com/abstract=2322732

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mirko Stanislav Heinle

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Chong Huang

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

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