Voluntary Disclosure in Light of Control Concerns

Posted: 9 Aug 2021

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Ram Ramanan

SUNY at Binghamton - School of Management; Indian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 07, 2021

Abstract

The centrality of private information in the design of accounting institutions has been explored via agency models that address control concerns as well as disclosure models that amplify valuation issues. This paper derives disclosures by an entrepreneur-owner when both control and valuation concerns are in play. In particular, the disclosures influence stock price not only via a direct impact on valuation of the firm’s revenue but also via an indirect impact on the firm’s cost of procuring inputs from a self-interested and privately informed upstream supplier. In this setting, disclosures are judiciously designed to influence the supplier’s decision to share cost information and to control information rents embedded in the procurement contract within the supply chain. Specifically, in order to convey that information rents are not in the offing and, thus, motivate information sharing by the supplier, the owner has incentives to convey a less “rosy” picture. In effect, when controlling supplier actions also becomes important, the owner discloses some unfavorable revenue news that she would have otherwise withheld and conceals some favorable revenue news that she would have otherwise revealed. Consequently, in our model, the disclosure region is either two-tailed or intermediate, in contrast to the single-tailed disclosure region implied by familiar valuation considerations alone.

Keywords: adverse selection, control problems, private information, voluntary disclosure, supply chain frictions

Suggested Citation

Arya, Anil and Ramanan, Ram, Voluntary Disclosure in Light of Control Concerns (July 07, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3886549

Anil Arya (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ram Ramanan

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Indian School of Business ( email )

Gachibowli
Hyderabad, 500032
India

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