The Real Costs of Disclosure

Alex Edmans, Chong Huang and Mirko Heinle

No 9637, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper models the effect of disclosure on real investment. We show that, even if the act of disclosure is costless, a high-disclosure policy can be costly. Some information ("soft") cannot be disclosed. Increased disclosure of "hard" information augments absolute information and reduces the cost of capital. However, by distorting the relative amounts of hard and soft information, increased disclosure induces the manager to improve hard information at the expense of soft, e.g. by cutting investment. Investment depends on asset pricing variables such as investors' liquidity shocks; disclosure depends (non-monotonically) on corporate finance variables such as growth opportunities and the manager's horizon. Even if a low disclosure policy is optimal to induce investment, the manager may be unable to commit to it. If hard information turns out to be good, he will disclose it regardless of the preannounced policy. Government intervention to cap disclosure can create value, in contrast to common calls to increase disclosure.

Keywords: Cost of capital.; Disclosure; Financial and real efficiency; investment; Managerial myopia (search for similar items in EconPapers)
JEL-codes: G18 G31 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: The Real Costs of Disclosure (2013)
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