The Effect of Voluntary Disclosure on Investment Inefficiency

The Accounting Review

45 Pages Posted: 3 Jan 2019 Last revised: 11 May 2020

See all articles by Ilan Guttman

Ilan Guttman

Leonard N. Stern School of Business, New York University; New York University - Stern Scholl of business

Xiaojing Meng

New York University (NYU) - Department of Accounting

Date Written: December 18, 2018

Abstract

Firms' ability to voluntarily disclose or conceal information may affect their investment decisions. In particular, voluntary disclosure in the presence of uncertainty about information endowment (a la Dye 1985) induces firms to choose the riskier among projects with equal expected returns (Ben-Porath et al. 2017). We study multi-stage investment decisions in which the firm's manager first chooses between projects with different riskiness and later may privately learn additional information about the technology of the chosen project. If informed, the firm can voluntarily disclose the new information to the market. Finally, based on the available information the manager determines the scale of the investment. If uninformed, the manager cannot tailor the investment scale to the realized technology. The resulting decrease in expected cash flow is higher for a riskier project. We study how a manager, who cares about both the firm's stock price (myopic incentive) and the long-term cash flow, optimally chooses the project and the voluntary disclosure decision, and how the investment efficiency varies with managerial myopia and information environment. As expected, managerial myopia always (weakly) decreases overall investment efficiency. However, information environment (the probability of obtaining information) may have a non-monotonic effect on overall investment efficiency. We extend the base model to allow for costly information acquisition and show that main results still hold.

JEL Classification: D89

Suggested Citation

Guttman, Ilan and Meng, Xiaojing, The Effect of Voluntary Disclosure on Investment Inefficiency (December 18, 2018). The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3303486 or http://dx.doi.org/10.2139/ssrn.3303486

Ilan Guttman

Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University - Stern Scholl of business ( email )

Xiaojing Meng (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

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