Optimal Reporting When Additional Information Might Arrive
78 Pages Posted: 30 Sep 2015 Last revised: 11 Feb 2018
Date Written: April 21, 2015
We study interdependencies between a firm's design of its reporting system and its discretionary disclosure of subsequently received private information in a context where the firm primarily seeks to induce posterior beliefs that meet a desired threshold. We show that the design of a reporting system influences discretionary disclosure strategies and the presence of a discretionary disclosure stage influences the reporting system design. In particular, realizations from an optimal reporting system may accommodate or dissuade disclosure of private information, and the prospect of subsequent disclosure of private information affects the informativeness of the reporting system. We show that a firm is unambiguously better off if it can either avoid receiving private information or commit to not disclose private information if received. Assuming that mandatory disclosure is implementable, we further find sufficient conditions whereby such a regime not only makes the firm worse off but also reduces the amount of information provided to investors in expectation. Of interest to empirical researchers, we offer comparisons and comparative statics related to the probabilities of disclosing private information under no reporting system, a fixed reporting system, and a system optimally chosen by the firm.
Keywords: Bayesian persuasion, discretionary disclosure, mandatory disclosure, verifiable messages, commitment, probability of disclosure
JEL Classification: D82, M40, M41
Suggested Citation: Suggested Citation