Communication of soft information: Reputation and imperfect enforcement of reporting quality

Jay Pil Choi, Eirik Gaard Kristiansen, Jae Nahm

    Research output: Contribution to journalArticlepeer-review

    2 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    Pages (from-to)91-106
    Number of pages16
    JournalJournal of Economic Behavior and Organization
    Volume136
    DOIs
    Publication statusPublished - 2017 Apr 1

    Bibliographical note

    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.

    Keywords

    • Cheap talk
    • Credibility
    • Investments

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Organizational Behavior and Human Resource Management

    Fingerprint

    Dive into the research topics of 'Communication of soft information: Reputation and imperfect enforcement of reporting quality'. Together they form a unique fingerprint.

    Cite this