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Keywords:

  • Discretionary Disclosure;
  • Upfront Investment;
  • Abandonment Option;
  • Welfare Ordering

Abstract

This study examines efficiency implications of discretionary disclosure for ex ante investment and ex post project abandonment in an entrepreneurial setting. Privacy of the ex ante investment combined with subsequent discretionary disclosure of information about a project's future payoff engenders under-investment. This contrasts with possible over-investment when the ex ante investment is publicly observable. Distortions in ex ante investment lead to inefficiencies in ex post project abandonment. If the ex ante investment is unobservable, greater likelihood of receiving private information or higher quality of that information alleviates under-investment. By contrast, if the ex ante investment is observable, information may be ex ante valueless. These results may be useful for assessing real effects of disclosure regulations and conducting empirical inquires about upfront investment, project abandonment, and frequency of IPOs.

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