Self-Enforcing Voluntary Disclosures

This paper extends previous accounting research which asks why firms do not voluntarily disclose all value-relevant information, as implied by, for example, Grossman [1981] and Milgrom [1981]. While these two models assume disclosures are costless and verifiable, subsequent papers by Verrecchia [1983], Dye [1985 b], Darrough and Stoughton [1990], Wagenhofer [1990], Feltham and Xie [1992], and Newman and Sansing [1993] suggest firms withhold private information to avoid proprietary costs.1 In contrast to these models, I show that proprietary costs can actually increase voluntary disclosures by generating credibility for such disclosures. I model the decision to disclose private information when independent verification is impossible, too costly, or otherwise unavailable. The results rationalize unverified voluntary disclosures, and market reactions to them, by showing that the costs of disclosing proprietary information can make such disclosures credible, even without verification. In the model, a firm with private information about the demand for its product makes a direct public disclosure to both a competitor and the capital market. The firm would like to convince the capital market that the demand for its product is high, thereby increasing the value of the