A Theory of Hard and Soft Information

41 Pages Posted: 19 Sep 2014 Last revised: 20 Jul 2016

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School

Ivan Marinovic

Graduate School of Business, Stanford University

Date Written: July 19, 2016

Abstract

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

Bertomeu, Jeremy and Marinovic, Ivan, A Theory of Hard and Soft Information (July 19, 2016). Accounting Review, Forthcoming, Rock Center for Corporate Governance at Stanford University Working Paper No. 194, Available at SSRN: https://ssrn.com/abstract=2497613 or http://dx.doi.org/10.2139/ssrn.2497613

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Ivan Marinovic (Contact Author)

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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