Suil Pae

Acquisition and Discretionary Disclosure of Private Information and its Implications for Firms' Productive Activities

The objective of this study is to examine the implications of discretionary disclosure for a firms production efficiency when acquiring private information is costly. In particular, this paper extends the discretionary disclosure model of Dye [1985] and Jung and Kwon [1988] to a setting in which an entrepreneur provides productive effort and potentially acquires a costly private signal that he may or may not disclose subsequently. Three main results are derived. First, even if the entrepreneur is ex ante best off by not acquiring any private information ex post, he cannot credibly pre-commit to do so. Second, because of the inevitable ex post incentives associated with acquiring and exercising discretion over the disclosure of a private signal, the entrepreneurs ex ante equilibrium effort is distorted away from the first-best level. Finally, it is shown that the entrepreneurs ex ante welfare is maximized when the signal is least informative because there is no efficiency loss in that case.

Optimal Disclosure Policy in Oligopoly Markets

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.

Voluntary Disclosure of Disaggregated Earnings Information

Abstract This paper provides an equilibrium analysis of a setting in which a manager is required to disclose GAAP earnings, but has discretion over the provision of information about earnings components that are disaggregated according to their persistence or value relevance. We find that the manager is more likely to disclose disaggregated earnings information when GAAP earnings fall. We derive intuitive comparative static results concerning the impacts of firm characteristics on the managers equilibrium disclosure choice. We also discuss how the papers main results are linked to empirical findings on pro forma earnings disclosures.

Prior Beliefs and Posterior Assurance in a Sequential Audit Process

Abstract This paper presents a model, in which an auditor is a priori unsure whether his client firms financial statements are misstated. We derive the auditors optimal decision rule in a multi-stage audit process and show that, under some regularity conditions, assurance—the posterior probability that the firms financial statements are not misstated conditional on the auditors attestation that they are not—is independent of the auditors prior beliefs about potential misstatements in the financial statements. We also discuss how the model could be extended to settings in which a firm, an auditor, and financial statement users interact strategically.