Renegotiation-Proof Contracting, Disclosure, and Incentives for Efficient Investment

34 Pages Posted: 3 Feb 2005  

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Date Written: June 13, 2007

Abstract

Disclosure by firms would seem to reduce the informational asymmetry that is a cause of investment inefficiency in firms. However, the effect of disclosure is subtle, especially when the link between disclosure and firm value is endogenous and depends on incentives within the firm. We analyze various disclosure regimes and determine which ones are effective in a model with optimal renegotiation-proof contracts. Disclosing only accepted contracts is not effective, but either full transparency of all compensation negotiations or, more reasonably, additional disclosure of a forward-looking announcement is effective. The model is robust to renegotiation in equilibrium and is also robust to changing who offers any renegotiation. The analysis illuminates optimal disclosure regulation. For example, it tells us that allowing forward-looking disclosure is beneficial provided we are in an environment that produces the optimal contract, which gives the manager an incentive for truth-telling.

Keywords: Investment efficiency, compensation disclosure, earnings forecasts, optimal contracting, renegotiation-proofness

JEL Classification: G38, M41, M52

Suggested Citation

Baranchuk, Nina and Yang, Jun and Dybvig, Philip H., Renegotiation-Proof Contracting, Disclosure, and Incentives for Efficient Investment (June 13, 2007). AFA 2006 Boston Meetings. Available at SSRN: https://ssrn.com/abstract=659582 or http://dx.doi.org/10.2139/ssrn.659582

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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