Optimal Reporting When Additional Information Might Arrive

52 Pages Posted: 30 Sep 2015 Last revised: 12 Nov 2019

See all articles by Henry L. Friedman

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 15, 2015

Abstract

We study how the potential for discretionary disclosure affects the way a firm designs its reporting system. In our model, the firm's primary but nonexclusive concern is to induce beliefs that exceed a threshold. Such thresholds arise in numerous contexts, including investing decisions, liquidation/continuation choices, covenants, audits, impairments, listing requirements, index inclusion, credit ratings, analyst recommendations, and stress tests. The optimal reporting system is characterized by informative good reports when the threshold is high and, potentially, uninformative reports when the threshold is low. Under an optimal impairment-type reporting system, the likelihood of reported impairments and the information content of non-impairment reports both increase in the probability of the firm observing private information. We provide a novel motivation for the quiet period around an IPO and empirical predictions relating the probability of discretionary disclosure to the properties of financial reports. In extensions, we consider disclosure mandates, report manipulation, endogenous thresholds, and alternative payoff functions.

Keywords: Bayesian persuasion, discretionary disclosure, mandatory disclosure, verifiable messages, commitment

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 15, 2015). Journal of Accounting & Economics (JAE), Forthcoming. 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 )

D406 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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