Suil Pae, Acquisition and Discretionary Disclosure of Private Information and Its Implications for Firms' Productive Activities, Journal of Accounting Research, Vol. 37, No. 2 (Autumn, 1999), pp. 465-474

This paper examines the private and social optimality of full disclosure of private information in a two‐period oligopoly model. An incumbent firm is privately informed about the market demand and its production cost after operating as a monopolist in the first period, and then competes against an entrant in the second period. Two main results are derived. First, it is shown that the incumbent is best off by pre‐committing to disclose both the demand and cost information. By disclosing full information, the incumbent nullifies its self‐defeating intertemporal incentives, which arise whenever it has private information about the market demand, its cost efficiency, or both. In addition, the equilibrium output variance is the largest under full disclosure, which benefits the incumbent ex ante. Second, the paper shows that the incumbent’s full disclosure of the demand and cost information may or may not be desirable from a social efficiency standpoint. In particular, the correlation between the firms’ production costs is crucial to the rank of disclosure policies in terms of their impact on social efficiency.

ABSTRACT This paper presents a model in which investors price risk and a firm makes an investment to reduce its cash flow risk. Subsequently, the firm may or may not privately receive information about the future cash flow, whose disclosure is under its discretion. We show that the equilibrium cash flow precision increases with investor risk aversion, but decreases with the likelihood that the firm has private information and the quality of that information. In addition, the equilibrium probability of disclosure increases when the firm is more likely to have higher-quality private information, but it may increase or decrease when investor risk aversion increases. Using these comparative statics, we rationalize mixed empirical findings on the relation between risk and disclosure as equilibrium outcomes. The model is extended to a setting where the firm also makes an investment to increase the mean of its future cash flow. JEL Classifications: D61; G14; M41.