Optimal Release of Information By Firms

TLDR

Prior work shows that voluntary disclosure often harms shareholders due to adverse risk‑sharing, and existing signalling models are inconsistent with firms facilitating future signals because releases make investors worse off. The study develops a positive theory of voluntary disclosure, aiming to show that an optimal disclosure policy can improve shareholder welfare. Using a general‑equilibrium model with endogenous information collection, the authors demonstrate that a disclosure policy exists that makes all shareholders better off than no disclosure. The model shows that welfare gains arise from information‑cost savings and better risk sharing, that the optimal policy is unanimously supported by stockholders and maximizes ex‑ante value, and that it fills a missing link in financial signalling theory.

Abstract

ABSTRACT This paper provides a positive theory of voluntary disclosure by firms. Previous theoretical work on disclosure of new information by firms has demonstrated that releasing public information will often make all shareholders worse off, due to an adverse risk‐sharing effect. This paper uses a general equilibrium model with endogenous information collection to demonstrate that there exists a policy of disclosure of information which makes all shareholders better off than a policy of no disclosure. The welfare improvement occurs because of explicit information cost savings and improved risk sharing. This provides a positive theory of precommitment to disclosure, because it will be unanimously voted for by stockholders and will also represent the policy that will maximize value ex ante. In addition, it provides a “missing link” in financial signalling models. Apart from the effects on information production analyzed in this paper, most existing financial signalling models are inconsistent with a firm taking actions which facilitate future signalling because release of the signal makes all investors worse off.