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Corporate Disclosure and Accounting

Paper Session

Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Regency Ballroom C2
Hosted By: American Finance Association
  • Chair: Ivan Marinovic, Stanford University

Credit Ratings: Strategic Issuer Disclosure and Optimal Screening

Jonathan Cohn
University of Texas-Austin
Uday Rajan
University of Michigan
Günter Strobl
Frankfurt School of Finance & Management


We study a model in which an issuer can manipulate information obtained by a credit rating agency (CRA) seeking to screen and rate its financial claim. Better CRA screening leads to a lower probability of obtaining a high rating but makes a high rating more valuable. Over an intermediate range of manipulation cost, improving screening quality can lead to more manipulation, dampening the CRA's incentive to screen. We further show that a CRA's own incentives to inflate ratings constrain its optimal screening intensity. Our model suggests that strategic disclosure by issuers may have played a role in recent ratings failures.

Optimal Financing and Disclosure

Martin Szydlowski
University of Minnesota


How 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

Snehal Banerjee
University of California-San Diego
Taejin Kim
Chinese University of Hong Kong
Vishal Mangla
Moody's Analytics


How 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.
Edwige Cheynel
Columbia University
Davide Cianciaruso
Northwestern University
Mirko Heinle
University of Pennsylvania
JEL Classifications
  • G3 - Corporate Finance and Governance