Working Paper: NBER ID: w19420
Authors: 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.
Keywords: Disclosure; Investment; Cost of Capital; Corporate Finance
JEL Codes: G18; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased disclosure of hard information (G38) | reduce the cost of capital (G32) |
| excessive disclosure (D82) | distort the relative amounts of hard and soft information (D80) |
| distort the relative amounts of hard and soft information (D80) | managers favor short-term gains (L21) |
| managers favor short-term gains (L21) | cut back on long-term investments (G31) |
| cut back on long-term investments (G31) | harm the firm's long-term value (L21) |
| managers cannot commit to low-disclosure policy (D82) | disclose good news regardless of prior commitments (G14) |
| disclose good news regardless of prior commitments (G14) | unraveling effect complicates investment decisions (G11) |
| government intervention to cap disclosure (G18) | create value (D46) |
| optimal level of disclosure varies nonmonotonically with firm characteristics (D21) | relationship between disclosure and investment is complex and context-dependent (G11) |