In the preceding paper Darrough and Stoughton suggest that firm interdependence, modelled as an entry game among firms in a product market, can yield endogenous proprietary costs. This allows the costs associated with the dissemination of information about the firm to depend upon the information's content in some direct way. My comments focus on: first, the structure of the game, which emphasizes the potential for full disclosure; second, the extent to which the entry game exaggerates the usefulness of ‘bad news’; and third, their suggestion that more competition among firms implies more, and not less, disclosure, an observation seemingly contrary to Verrecchia (1983).

This paper considers the role of an agent choosing among reporting alternatives when that choice is unobserved by the principal, and the agent's compensation contract is optimal. The agent is allowed to take post-outcome costly actions which lead to more precise reports of actual profits than would be yielded by less precise, but costless conventional translations of outcomes (e.g., GAAP). The extent to which the principal allows the agent this discretion depends upon the improvement in profits as an indicator of the agent's pre-outcome effort when post-outcome actions take place versus the attendant cost of these actions.

Daily returns are used to investigate the effect of preferred stock rating change announcements on preferred and common stock prices. Announcements that are free of confounding events, ‘clean’ announcements, significantly affect preferred stock prices. However, the effect occurs after the day of announcement, mostly on event day +1. Conversely, there is no evidence ‘clean’ announcements affect common stock prices. Larger preferred stock abnormal returns are associated with announcements that are contaminated by confounding events, but the abnormal returns appear to be the result of the confounding events more than the rating change.

This paper shows how the existence of disclosure-related costs offers an explanation for why a manager exercise discretion in disclsing information even though traders have rational expectations about his motivation to withhold unfavorable reports. In effect, disclosure-related costs introduce noise by extending the range of possible interpretations of withheld information to include news which is actually favorable. Therefore, traders are unable to interpret withheld information as unambiguously ‘bad new’ and thereby discount the value of the firm to the point that the manager is better served to disclose what he knows.

Analyst forecasts, Analyst forecast errors, Correlated forecast errors, Private information

Income smoothing, Chemical industry, Real smoothing, Artificial smoothing