Information disclosure quality: correlation versus precision

We investigate how a multidimensional disclosure quality (i.e., correlation and precision) determines an optimal information disclosure strategy. We find that, for an infinitely lived, unlevered firm with market perfection, a truth‐telling disclosure is optimal at increasing the expected firm value....

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Bibliographic Details
Published in:Accounting and finance (Parkville) 2019-06, Vol.59 (2), p.1033-1053
Main Authors: Cheung, Adrian (Wai‐Kong), Hu, Wei
Format: Article
Language:English
Subjects:
correlation
Disclosure
disclosure quality
information disclosure
managerial incentive
market imperfection
Market value
Quality
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Summary:We investigate how a multidimensional disclosure quality (i.e., correlation and precision) determines an optimal information disclosure strategy. We find that, for an infinitely lived, unlevered firm with market perfection, a truth‐telling disclosure is optimal at increasing the expected firm value. However, for a finitely lived, levered firm in the presence of market imperfections (e.g., bankruptcy cost), the optimal disclosure quality depends negatively on the level of imperfections. Once we consider the agency problem, such dependence can become positive, thereby highlighting the importance of a proper managerial‐incentive scheme to align the information disclosure interests of managers and shareholders.
ISSN:0810-5391
1467-629X
DOI:10.1111/acfi.12282