Voluntary disclosure when private information and disclosure costs are jointly determined

Jung Min Kim; Daniel J. Taylor; Robert E. Verrecchia

doi:10.1007/s11142-021-09601-z

Voluntary disclosure when private information and disclosure costs are jointly determined

Jung Min Kim, Daniel J. Taylor^*, Robert E. Verrecchia

^*Corresponding author for this work

Accounting Information and Management

Research output: Contribution to journal › Article › peer-review

18 Scopus citations

Abstract

Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

Original language	English (US)
Pages (from-to)	971-1001
Number of pages	31
Journal	Review of Accounting Studies
Volume	26
Issue number	3
DOIs	https://doi.org/10.1007/s11142-021-09601-z
State	Published - Sep 2021

Funding

We thank seminar participants at The Wharton School, the Accounting and Economics Society, and the Review of Accounting Studies conference, and Beth Blankespoor, Ed deHaan, Ron Dye, Russ Lundholm (editor), Ivan Marinovic (discussant), Nathan Marshall, Brian Miller, Robbie Moon, Delphine Samuels, Jake Thornock, Alfred Wagenhofer, Gwen Yu, Sarah Zechman, Christina Zhu, and an anonymous referee for helpful comments.

Keywords

Adverse selection
Capital investment
Disclosure costs
Major customers
Private information
Proprietary costs
Voluntary disclosure

ASJC Scopus subject areas

Accounting
General Business, Management and Accounting

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10.1007/s11142-021-09601-z

Cite this

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title = "Voluntary disclosure when private information and disclosure costs are jointly determined",

abstract = "Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.",

keywords = "Adverse selection, Capital investment, Disclosure costs, Major customers, Private information, Proprietary costs, Voluntary disclosure",

author = "Kim, \{Jung Min\} and Taylor, \{Daniel J.\} and Verrecchia, \{Robert E.\}",

note = "Funding Information: We thank seminar participants at The Wharton School, the Accounting and Economics Society, and the Review of Accounting Studies conference, and Beth Blankespoor, Ed deHaan, Ron Dye, Russ Lundholm (editor), Ivan Marinovic (discussant), Nathan Marshall, Brian Miller, Robbie Moon, Delphine Samuels, Jake Thornock, Alfred Wagenhofer, Gwen Yu, Sarah Zechman, Christina Zhu, and an anonymous referee for helpful comments. Publisher Copyright: {\textcopyright} 2021, The Author(s).",

year = "2021",

month = sep,

doi = "10.1007/s11142-021-09601-z",

language = "English (US)",

volume = "26",

pages = "971--1001",

journal = "Review of Accounting Studies",

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AU - Kim, Jung Min

AU - Taylor, Daniel J.

AU - Verrecchia, Robert E.

N1 - Funding Information: We thank seminar participants at The Wharton School, the Accounting and Economics Society, and the Review of Accounting Studies conference, and Beth Blankespoor, Ed deHaan, Ron Dye, Russ Lundholm (editor), Ivan Marinovic (discussant), Nathan Marshall, Brian Miller, Robbie Moon, Delphine Samuels, Jake Thornock, Alfred Wagenhofer, Gwen Yu, Sarah Zechman, Christina Zhu, and an anonymous referee for helpful comments. Publisher Copyright: © 2021, The Author(s).

PY - 2021/9

Y1 - 2021/9

N2 - Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

AB - Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

KW - Adverse selection

KW - Capital investment

KW - Disclosure costs

KW - Major customers

KW - Private information

KW - Proprietary costs

KW - Voluntary disclosure

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SN - 1380-6653

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JO - Review of Accounting Studies

JF - Review of Accounting Studies

IS - 3

ER -

Voluntary disclosure when private information and disclosure costs are jointly determined

Abstract

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Keywords

ASJC Scopus subject areas

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