Information Disclosure, Real Investment, and Shareholder Welfare

Abstract

This paper investigates the preferences of a firm's current and future shareholders for the quality of mandated public disclosures in a dynamic setting with real investments. We find that while the firm's investment monotonically increases in disclosure quality, the welfare of the firm's current shareholders can be maximized by an imperfect disclosure regime. In particular, the current shareholders prefer an intermediate level of public disclosures if (i) the firm's current assets in place are small relative to its future growth opportunities, and either (ii) the firm's investment is observable by the stock market and sufficiently elastic with respect to the cost of capital, or (iii) the firm's investment is not directly observable by the stock market and is sufficiently inelastic with respect to the cost of capital. The firm's future shareholders prefer more precise public disclosures if the firm’s growth rate during their period of ownership is sufficiently high.

Keywords: Investment; Cost of Capital; Information Disclosure; Welfare

JEL Classification: D53; E22; G12; M41