Suijs, J. (Tilburg University, Center for Economic Research)
Abstract
This paper analyzes the disclosure strategy of firms that face uncertainty regarding the investor's response to a voluntary disclosure of the firm's private information. This paper distinguishes itself from the existing disclosure literature in that firms do not use voluntary disclosures to separate themselves from the less profitable firms. Here, voluntary disclosures are used to redistribute risk. It is shown that in a partial disclosure equilibrium, a firm discloses relatively bad news and withholds relatively good news. The reason for nondisclosure is that a firm is not willing to risk a negative response by the investor. However, if private information is relatively bad, nondisclosure imposes such a high risk on the investor, that he invests most of his capital in investment opportunities other than the firm. In that case, the firm is better off by disclosing its private information as this reduces the risk of the investor and increases the expected investment in the firm.
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Publisher Info
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
90.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
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