Much work has been devoted to studying optimal levels of discretionary corporate disclosures, a topic of particular interest since electronic communication has dramatically lowered the cost of sharing information once printed and mailed to each shareholder.
Work by Robert E. Verrecchia of the University of Pennsylvania shows that when disclosure costs are fixed, the threshold level of disclosure is negatively related to the quality of information (precision) to be disclosed. That is, as information rises in quality (is more precise), the threshold for disclosure is lowered. The thinking behind this finding is that corporate executives have concluded that the better the information, the more harmful it is for the firm to withhold it.
In this paper, we look to see what happens when costs are not fixed; that is, as the quality of information improves, the cost of gathering and transmitting it increases. We find that when this is the case, Verrecchia’s unambiguous result does not hold.
The presence of information quality in the cost function creates a countervailing force such that more precise information does not necessarily imply more disclosure. This suggests that corporate leaders have an added incentive to withhold from the market precise information of a proprietary nature.