CDAM: Computational, Discrete and Applicable Mathematics@LSE

 CDAM Research Report, LSE-CDAM-2009-02

January 2009

Using Voluntary Disclosure Intensity to Infer the Precision of Managements Vision

Miles B. Gietzmann and Adam J. Ostaszewski

Shin (2006) has argued that in order to understand the equilibrium patterns of corporate disclosure, it is necessary for researchers to work within an asset pricing model framework in which corporate disclosures are endogenously determined. Furthermore, he argues that without such a framework optimal disclosure strategies may seem counter-intuitive. With this in mind, we generalize the Dye (1985) and Penno (1997) upper tailed disclosure models, so that management's strategic disclosure behaviour can be shown to result in an optimal observable disclosure intensity. We show why a higher equilibrium disclosure intensity may need to be interpreted as implying management have less precise forecasts of future firm value (referred to in the title precision of management's vision). The derived results call into question the specification of empirical studies which test whether firms with higher disclosure intensity will face a lower cost of capital. Working within a generalized Dye-Penno framework this research shows why in equilibrium the converse case applies.

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