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Information disclosure quality: correlation versus precision

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  • Adrian (Wai‐Kong) Cheung
  • Wei Hu

Abstract

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.

Suggested Citation

  • Adrian (Wai‐Kong) Cheung & Wei Hu, 2019. "Information disclosure quality: correlation versus precision," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(2), pages 1033-1053, June.
    • Handle: RePEc:bla:acctfi:v:59:y:2019:i:2:p:1033-1053
    DOI: 10.1111/acfi.12282
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