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Loews Philadelphia, Regency Ballroom C2
American Finance Association
Corporate Disclosure and Accounting
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Ivan Marinovic, Stanford University
Optimal Financing and Disclosure
AbstractHow does a firm’s disclosure policy depend on its choice of financing? In this paper, I study a firm that finances a project with uncertain payoffs and jointly chooses its disclosure policy and the security issued. I show that it is optimal to truthfully reveal whether the project’s payoffs are above a threshold. This class of threshold policies is optimal for any prior belief, for any security, and any increasing utility function of the entrepreneur. I characterize how the optimal disclosure threshold depends on the underlying security, the prior, and the cost of investment. The optimal security design is indeterminate despite the presence of adverse selection. Among others, the optimum can be implemented with equity, debt, and options.
Conceal to Coordinate
AbstractHow informative is communication when players have an incentive to coordinate, but cannot commit to disclosing their private information? We study one-sided cheap talk in a two player investment game, where each player has noisy private information about fundamentals and the investment decision exhibits complementarity. Despite incentives to coordinate, we find that informative cheap-talk is fragile. Even when payoffs are symmetric, the sender must conceal information: when she chooses to invest, she only reveals that she will invest. We then ask whether the ability to commit to full disclosure is valuable. Surprisingly, we find that both the sender and the receiver may prefer partially informative cheap-talk to an equilibrium in which the sender commits to disclosing her information perfectly.
University of Pennsylvania
- G3 - Corporate Finance and Governance