Which is better, selective disclosure or fair disclosure? The effects of information asymmetry and incentive misalignment

ABSTRACT

This paper analyzes the selective disclosure and fair disclosure in a persuation game in which there are incentive misalignment and information asymmetry between the manager and investors.  The selective dislcosure regime gives the manager the flexibility to choose the fraction of the investors who can receive the information but the fair disclosure regime regulates the manager in the way that she is only allowed to reveal the information or withhold the information to all the investors. I conclude that when the incentive misalignment and information asymmetry  are both sufficiently small (great), the manager and investor both prefer the fair disclosure (selective dislcosure) regime. On the other hand, if the information asymmetry and incentive misalignment are intermediate, the manager prefers the selective disclosure regime and the investor prefers the fair disclosure regime, showing the necessity of taking the heterogeneity of firms into consideration when implementing Reg FD. Furthermore, I show that the small investors prefer the fair disclosure regime when the market size of large investors is sufficiently large, showing that the rgulator should pay attention to the conditions under which the small investors will be worse off after the implementation of Reg FD.

KEYWORDS:

• Selective disclosure
• fair disclosure
• Reg FD
• information asymmetry
• incentive misalignment

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. For instance, the Chief Executive Officer of Netflix has used his personal Facebook page, on 3 July 2012, to announce that Netflix had streamed 1 billion hours of content in the month of June, which has been investigated by the SEC to see whether this behavior violates Reg FD.

2. With probability $\left(1-q\right)$, the investors are uninformed with the true state of nature such that the message disclosed by the manager will affect the investor’s action and with probability $q$, the investors get to know the true state of nature, each of them will choose the action equal to the realized value of the state of nature, obtaining utility level equal to 0 and giving rise to $-b^2$ unities of the utility for the manager. As I am only interested in the effects derived from the information asymmetry and incentive misalignment on the information disclosure, $q$ will be taken as exogenous parameter throughout the entire paper, thus fixing $q=0$ will not bring about qualitatively differences with assuming $q$ to be other values.

3. Recall that in the above demonstrations, the manager will withhold the information if and only if $\theta \in \left[min\left(0,y^{\ast }-2b\right),y^{\ast }\right]$where $y^{\ast }$is the anticipated default action of the investor. Thus given $y^{\ast }$, the smaller $b$, or equivalently, the smaller incentive misalignment, leads to less information withheld and more information disclosed.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71703178]; Program for Innovation Research in Central University of Finance and Economics [020550319001].