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The Real Costs of Disclosure

Author

Listed:
  • Alex Edmans
  • Mirko Heinle
  • Chong Huang
Abstract
This paper models the effect of disclosure on real investment. We show that, even if the act of disclosure is costless, a high-disclosure policy can be costly. Some information ("soft") cannot be disclosed. Increased disclosure of "hard" information augments absolute information and reduces the cost of capital. However, by distorting the relative amounts of hard and soft information, increased disclosure induces the manager to improve hard information at the expense of soft, e.g. by cutting investment. Investment depends on asset pricing variables such as investors' liquidity shocks; disclosure depends (non-monotonically) on corporate finance variables such as growth opportunities and the manager's horizon. Even if a low disclosure policy is optimal to induce investment, the manager may be unable to commit to it. If hard information turns out to be good, he will disclose it regardless of the preannounced policy. Government intervention to cap disclosure can create value, in contrast to common calls to increase disclosure.

Suggested Citation

  • Alex Edmans & Mirko Heinle & Chong Huang, 2013. "The Real Costs of Disclosure," NBER Working Papers 19420, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19420
    Note: CF LE PR
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    References listed on IDEAS

    as
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    Cited by:

    1. Goldstein, Itay & Yang, Liyan, 2019. "Good disclosure, bad disclosure," Journal of Financial Economics, Elsevier, vol. 131(1), pages 118-138.
    2. Elchanan Ben-Porath & Eddie Dekel & Barton L Lipman, 2018. "Disclosure and Choice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1471-1501.
    3. Loderer, Claudio F. & Stulz, Rene M. & Waelchli, Urs, 2013. "Limited Managerial Attention and Corporate Aging," Working Paper Series 2013-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Marco Di Maggio & Marco Pagano, 2018. "Financial Disclosure and Market Transparency with Costly Information Processing [Bargaining with incomplete information]," Review of Finance, European Finance Association, vol. 22(1), pages 117-153.
    5. Alfred Wagenhofer, 2014. "Trading off Costs and Benefits of Frequent Financial Reporting," Journal of Accounting Research, Wiley Blackwell, vol. 52(2), pages 389-401, May.
    6. Tang, Ya, 2014. "Information disclosure and price discovery," Journal of Financial Markets, Elsevier, vol. 19(C), pages 39-61.
    7. Liyan Yang & Itay Goldstein, 2014. "Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects," 2014 Meeting Papers 154, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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