Optimal Reporting When Additional Information Might Arrive

78 Pages Posted: 30 Sep 2015 Last revised: 11 Feb 2018

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

John S. Hughes

University of California at Los Angeles

Beatrice Michaeli

University of California, Los Angeles (UCLA)

Date Written: April 21, 2015

Abstract

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

Friedman, Henry L. and Hughes, John S. and Michaeli, Beatrice, Optimal Reporting When Additional Information Might Arrive (April 21, 2015). Available at SSRN: https://ssrn.com/abstract=2666780 or http://dx.doi.org/10.2139/ssrn.2666780

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D416 Anderson Complex
Los Angeles, CA 90095-1481
United States

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Beatrice Michaeli

University of California, Los Angeles (UCLA) ( email )

D415 Anderson Complex
Los Angeles, CA 90095
United States

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