Unbalanced Information and the Interaction between Information Acquisition, Operating Activities, and Voluntary Disclosure

Abstract

As different activities cannot be measured or communicated with the same precision, accounting information is often only a partial and unbalanced reflection of the fundamental economics, emphasizing certain aspects of the underlying operations while disregarding others. We highlight this inherent imbalance in information as the source of an interaction between corporate operating and discretionary disclosure strategies, and thereby also as an important determinant of the information acquisition strategy. We demonstrate that information imbalance, via its distorting effect on operating activities, leads to a reduction in the propensity of managers to acquire information and provide voluntary disclosures.

The financial reporting environment: Review of the recent literature

“…Then, there exists an equilibrium in which the manager does not disclose asset values between 0.2 and 0.4 17 For example, managers receive information probabilistically if they may acquire information at unobservable (random) cost and, in equilibrium, acquire the information only if the cost is lower than a threshold. Then, the manager will be informed if the cost is sufficiently low and uninformed otherwise (see Hughes and Pae, 2004;Einhorn and Ziv, 2007). 18 A key assumption is that the manager cannot credibly convey that he did not receive information.…”

The Spanish Banks in face of the Corporate Social Responsibility Standards: previous analysis of the financial crisis

“…In many cases, this is insufficient to allow the evaluation of their CSR policies and practices, since there is a partial divulgation strategy for the information (anecdotes, certain projects and philanthropic activities), with the aim of concealing the most contradictory data (EINHORN; ZIV, 2007;GONG, 2007;OBSERVATORIO RSE, 2008).…”

Acquisition and Disclosure of Operational Information*

“… Dye (1985), Jung and Kwon (1988), Peno (1997), Hughes and Pae (2004), and Einhorn and Ziv (2007) considered that investors are unsure of the information status of firms (i.e., relaxation of the first assumption of unraveling). Nagar (1999), Fishman and Hagerty (2003), Fischer and Verricchia (2004), Einhorn (2007), and Suijs (2007) analyzed the firm's disclosure policy when different users interpret disclosures in different ways (i.e., relaxation of the second assumption of unraveling). Crawford and Sobel (1982), Newman and Sansing (1993), Gigler (1994), Fischer and Verricchia (2000), and Fischer and Stocken (2001) used the cheap‐talk model to study the disclosure equilibrium when the credibility of the firm's reports is endogenous (i.e., relaxation of the third assumption of unraveling). Verrecchia (1983, 1990), Lanen and Verrecchia (1987), Wagenhofer (1990), and Einhorn (2005) investigated the firm's disclosure policy when there is a fixed cost to disclosing the information (i.e., relaxation of the fourth assumption of unraveling). …”

“…Dye (1985), Jung and Kwon (1988), Peno (1997), Hughes and Pae (2004), and Einhorn and Ziv (2007) considered that investors are unsure of the information status of firms (i.e., relaxation of the first assumption of unraveling).…”