2022/10/20 by Miles B. Gietzmann, Gietzmann, Miles B., A. J. Ostaszewski +1 · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · #(Primary) #60G25 (Secondary) #60G35 #91-10 #91B38 #91B44 #91G50 #91G80 #93E11 #93E20 #93E35 #Auditing, Earnings Management, Governance #Corporate Finance and Governance #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Optimization and Control (math.OC) #Pricing of Securities (q-fin.PR)
paper · pdf · doi:10.48550/arxiv.2210.11315
openalex publication_date 2022/10/20 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
In a continuous-time setting we investigate how the management of a firm controls a dynamic choice between two generic voluntary disclosure decision rules: one with full and transparent disclosure termed \itcandid, the other, termed \itsparing, under which values only above a dynamic threshold are disclosed. We show how management are rewarded with a reputational premium for candour. The candid strategy is costly because the sparing alternative shields the firm from potential downgrades following low value disclosures. We show how parameters of the model such as news intensity, pay-for-performance and time-to-mandatory-disclosure determine the optimal choice of candid versus sparing strategy and the optimal time for management to switch between the two. The private news updates received by management are modelled with a Poisson process, occurring between the fixed mandatory disclosure dates, such as fiscal years or quarters, with the news received generated by a background Black-Scholes model of economic activity and of its partial observation. The model presented develops a number of insights, based on a very simple ordinary differential equation (ODE) characterizing equilibrium in a piecewise-deterministic model, derivable from the background Black-Scholes model. It is shown that in equilibrium when news intensity is low a firm may employ a candid disclosure strategy throughout, but will otherwise switch (alternate) between periods of being candid and periods of being sparing with the truth (or the other way about); that is, we are able to characterize when in equilibrium a candid firm will switch to adopting a sparing strategy. The model illustrates how parameters such as time to mandatory disclosure, news intensity and pay-for-performance may drive such switching behaviour. \itWith constant pay for performance parameters, at most one switching occurs.