“The Effect of Voluntary Disclosure on Investment Inefficiency” – by Dr. Xiaojing Meng
Accounting & Law Seminar
Dr Xiaojing Meng
Assistant Professor of Accounting
Stern School of Business
New York University
Firms' ability to voluntarily disclose or conceal information may affect their investment decisions. In particular, voluntary disclosure in the presence of uncertainty about information endowment (a la Dye 1985) induces firms to choose the riskier among projects with equal expected return (Ben-Porath et al 2017). We study multi-stage investment decisions in which the firm's manager first chooses between projects with different riskiness and later may privately learn additional information about the technology of the chosen project. If informed, the firm can voluntarily disclose the new information to the market. Finally, based on the available information the manager determines the scale of the investment. If uninformed, the manager cannot tailor the investment scale to the realized technology and hence incurs a cost of ignorance. This cost of ignorance is higher for the riskier project, leading to a lower expected cash flow. We study how a manager, who cares about both the firm's stock price following the disclosure stage (myopic incentive) and the long-term cash flow, optimally chooses the project and the voluntary disclosure decision, and how the investment efficiency varies with managerial myopia and information environment. As expected, managerial myopia always (weakly) decreases overall investment efficiency. However, information environment (the probability of obtaining information) has a non-monotone effect on overall investment efficiency.