Disclosures and investments
Corporate disclosure plays an important informational role in the functioning of capital markets. The public, value-relevant, information revealed through corporate disclosure influences the capital market pricing of a firm's shares. As a firm's investment incentive is partially provided by the market pricing of its shares, corporate disclosure in turn, affects the efficiency of the firm's investment decisions. This dissertation uses the economics-based models of disclosure to establish a link between firm financial disclosure and its economic consequences, and investigates how the efficiency of investment decisions responds to various feature of corporate disclosure.
This dissertation studies mandatory accounting disclosure and its economic consequences by distinguishing two broad bases for accounting measurements: input-based and output-based accounting. The results show that an output-based measure, such as a fair value measure, has a natural advantage in aligning investment incentives because of its comprehensiveness. The (first-) best investment is achieved when the output-based measure is noiseless and manipulation-free, and more accounting noise/manipulation always leads to more inefficient investment choices. On the other hand, an input-based measure, such as a historical cost measure, may induce more efficient investment decisions than an output-based measure even though it is not as comprehensive. In fact, under an input-based measure, the (first-) best result is achieved when the noise/manipulability is small but positive. In other words, for an input-based measure, being less comprehensive makes small but positive accounting noise/manipulability desirable.
This dissertation also investigates voluntary disclosure and focuses on the tradeoff for an individual firm when the benefits and costs of voluntary disclosure stem from the consequences of its investment decision. First, by transmitting value-relevant information to the market, voluntary disclosure leads to a more accurate pricing which, in turn, improves investment efficiency. Second, the firm may affect the market pricing of its shares in its favor by strategically disclosing or withholding its private information. This opportunistic use of disclosure has a feedback effect on investment efficiency, which may be distorted at the margin. The presence of a separate mandatory accounting report, while not directly useful in the firm's investment decision, improves the market pricing and may discipline the voluntary disclosure, because the accounting information helps disentangle the firm's disclosure incentive, which limits the opportunistic behavior and thus limits the efficiency loss.