TY - JOUR
T1 - Communication of soft information
T2 - Reputation and imperfect enforcement of reporting quality
AU - Choi, Jay Pil
AU - Kristiansen, Eirik Gaard
AU - Nahm, Jae
N1 - Funding Information:
We thank Romana Autrey, Carsten Bienz, Chiara Canta, Hans K. Hvide, Tiago da Silva Pinheiro, Frøystein Gjesdal, Finn Kinserdal, Trond Olsen, Tommy Stamland, Jack Stecher, and various seminar audiences for their helpful comments. We are also grateful to two anonymous referees and the Co-Editor Thomas Gresik for constructive comments which greatly improved this paper. Jay Pil Choi's research was supported by the National Research Foundation of Korea Grant funded by the Korean Government ((NRF-2016S1A5A2A01022389). Eirik Gaard Kristiansen gratefully acknowledges financial support from the Finance Market Fund.
Publisher Copyright:
© 2017 Elsevier B.V.
PY - 2017/4/1
Y1 - 2017/4/1
N2 - Entrepreneurs report unverifiable soft information to investors. The credibility of soft information depends on the entrepreneur's reputation concern. In equilibrium, high-talent entrepreneurs, who are better at developing profitable projects in the future and therefore have stronger reputation concerns, signal their talents by producing honest reports on current projects. We show how probabilistic third-party monitoring of reporting quality changes some firms’ reporting strategies, which again spill over to the financing costs of firms not directly affected by improved monitoring. In some cases, improved monitoring of reporting quality can reduce firms’ reputation concerns and result in less efficient communication of information.
AB - Entrepreneurs report unverifiable soft information to investors. The credibility of soft information depends on the entrepreneur's reputation concern. In equilibrium, high-talent entrepreneurs, who are better at developing profitable projects in the future and therefore have stronger reputation concerns, signal their talents by producing honest reports on current projects. We show how probabilistic third-party monitoring of reporting quality changes some firms’ reporting strategies, which again spill over to the financing costs of firms not directly affected by improved monitoring. In some cases, improved monitoring of reporting quality can reduce firms’ reputation concerns and result in less efficient communication of information.
KW - Cheap talk
KW - Credibility
KW - Investments
UR - http://www.scopus.com/inward/record.url?scp=85014477679&partnerID=8YFLogxK
U2 - 10.1016/j.jebo.2017.02.002
DO - 10.1016/j.jebo.2017.02.002
M3 - Article
AN - SCOPUS:85014477679
VL - 136
SP - 91
EP - 106
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
SN - 0167-2681
ER -