A Theory of Hard and Soft Information
41 Pages Posted: 19 Sep 2014 Last revised: 20 Jul 2016
Date Written: July 19, 2016
We study optimal disclosure via two competing communication channels; hard information whose value has been verified and soft disclosures such as forecasts, unaudited statements and press releases. We show that certain soft disclosures may contain as much information as hard disclosures, and we establish that: (a) exclusive reliance on soft disclosures tends to convey bad news, (b) credibility is greater when unfavorable information is reported and (c) misreporting is more likely when soft information is issued jointly with hard information. We also show that a soft report that is seemingly unbiased in expectation need not indicate truthful reporting. We demonstrate that mandatory disclosure of hard information reduces the transmission of soft information, and that the aggregation of hard with soft information will turn all information soft.
Keywords: cheap talk, disclosure, verification, financial reporting
JEL Classification: D72, D82, D83, G20
Suggested Citation: Suggested Citation