Rational exaggeration and counter-exaggeration in information aggregation games

We study an information aggregation game in which each of a finite collection of “senders” receives a private signal and submits a report to the center, who then makes a decision based on the average of these reports. The integration of three features distinguishes our framework from the related literature: players’ reports are aggregated by a mechanistic averaging rule, their strategy sets are intervals rather than binary choices, and they are ex ante heterogeneous. In this setting, players engage in a “tug-of-war,” as they exaggerate and counter-exaggerate in order to manipulate the center’s decision. While incentives to exaggerate have been studied extensively, the phenomenon of counter-exaggeration is less well understood. Our main results are as follows. First, the cycle of counter-exaggeration can be broken only by the imposition of exogenous bounds on the space of admissible sender reports. Second, in the unique pure-strategy equilibrium, all but at most one player is constrained with positive probability by one of the report bounds. Our third and fourth results hold for a class of “anchored” games. We show that if the report space is strictly contained in the signal space, then welfare is increasing in the size of the report space, but if the containment relation is reversed, welfare is independent of the size of the space. Finally, the equilibrium performance of our heterogeneous players can be unambiguously ranked: a player’s equilibrium payoff is inversely related to the probability that her exaggeration will be thwarted by the report bounds

Selective Disclosure, Expertise Acquisition and Price Informativeness

Publisher Copyright: © 2022 Canadian Academic Accounting Association.We examine how a firm's disclosure-audience policy affects investors' expertise acquisition and price informativeness in the market. We distinguish the investors' information advantage due to superior access from that due to superior ability to process information. We show that targeted selective disclosure to sophisticated investors may encourage greater expertise acquisition on the part of investors and lead to more informative prices than either public disclosure or untargeted selective disclosure, because the value of expertise is maximized if sophisticated investors gain exclusive information access at a relatively low cost. These results illuminate the persistence of private communications between investors and firms in the post-Regulation Fair Disclosure era and provide implications for regulators in addressing increasing concerns raised about the enforcement of Regulation Fair Disclosure.Peer reviewe

Why do Firms Gravitate to Selective Disclosure?

In this paper, we present a theoretical model to explain why firms gravitate to selective disclosure. We consider a setting where a firm chooses its disclosure policy to maximize its price informativeness (i.e., how much information is impounded in the price, measured by the posterior precision of true value conditional on the price) in a market with different types of traders. Through ex-ante acquisition of expertise, traders become sophisticated and improve their ability to better interpret the information disclosed by the firm. We show that firms sometimes prefer to disclose information selectively, providing information only to sophisticated traders, rather than to the public. The primary reason is that selective disclosure promotes the ex-ante expertise acquisition among traders. Consequently, under selective disclosure, the aggregate information quality is overall higher and prices are more informative than under public disclosure. However, selective disclosure may reduce uninformed investor welfare.</p