Voluntary Disclosure when Private Information and Disclosure Costs are Jointly Determined

Review of Accounting Studies, forthcoming

47 Pages Posted: 4 Jun 2020 Last revised: 29 Dec 2021

See all articles by Jung Min Kim

Jung Min Kim

Northwestern University - Kellogg School of Management

Daniel J. Taylor

The Wharton School, University of Pennsylvania

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: April 1, 2020

Abstract

Classical models of voluntary disclosure feature two economic forces: the existence of an adverse selection problem (e.g., a manager possesses some private information) and the cost of ameliorating the problem (e.g., costs associated with disclosure). Traditionally these forces are modelled independently. In this paper, we use a simple model to motivate empirical predictions in a setting where these forces are jointly determined––where greater adverse selection entails greater costs of disclosure. We show that joint determination of these forces generates a pronounced non-linearity in the probability of voluntary disclosure. We find that this non-linearity is empirically descriptive of multiple measures of voluntary disclosure in two distinct empirical settings that are commonly thought to feature both private information and proprietary costs: capital investments and sales to major customers.

Keywords: voluntary disclosure; adverse selection; private information; disclosure costs; proprietary costs; capital investment; major customers

Suggested Citation

Kim, Jung Min and Taylor, Daniel and Verrecchia, Robert E., Voluntary Disclosure when Private Information and Disclosure Costs are Jointly Determined (April 1, 2020). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3595320 or http://dx.doi.org/10.2139/ssrn.3595320

Jung Min Kim

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Daniel Taylor (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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