15 Theory (THEO)

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Now showing 1 - 4 of 4
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    Mandatory vs. voluntary ESG disclosure, efficiency, and real effects
    ( 2022) Aghamolla, Cyrus ; An, Byeong-Je
    In this study, we examine the equilibrium effects of ESG quality disclosure in both voluntary and mandatory regimes. A firm manager makes a private investment decision in an environmentally friendly or unfriendly project that affects future cash flows and the social externalities produced by the firm. We build from Shin (2003) and allow an informed manager to make potentially disparate disclosure decisions on multiple interdependent outcomes---future financial performance and ESG quality. We find that mandating ESG quality disclosure results in over-investment in the sustainable technology. That is, the manager often implements sustainable investment even though this is overall less preferred by shareholders. Moreover, a voluntary disclosure regime can be more efficient for investment than a mandatory regime, from the perspective of shareholders. The results also show that mandating ESG disclosure leads to a greater prevalence of sustainable investing. The results provide insights that can be relevant for public policy considerations regarding mandatory ESG disclosure as well as implications that can help to guide empirical research.
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    Optimal Reporting Systems with Investor Information Acquisition
    ( 2022) Huang, Zeqiong
    This paper analyzes the optimal design of a firm’s ex-ante reporting system when the reporting system affects investors’ information acquisition decisions. In my model, investors’ information acquisition (costly inspection) affects their willingness to finance the firm’s investment project, which in turn affects the firm manager’s payoff. I analyze how the informativeness and bias of a firm’s optimal reporting system depend on the market’s prior belief about the project profitability, the investors’ inspection cost, and the degree of incentive alignment between manager and investor. A mis-aligned manager’s system is informative only when the common prior is pessimistic, and the system is always positively biased, but less so when the investor’s inspection cost decreases. In contrast, a well-aligned manager’s system is counter-cyclical to the market belief when the inspection cost is low: it is positively (negatively) biased when the market belief is pessimistic (optimistic). I also analyze how the properties of the optimal reporting system are related to investment efficiency, and explore the extent to which the results generalize to a case with managerial manipulation. Overall, the analysis describes the complex interactions among determinants of firm disclosures, and offers explanations for the empirical results in this area and provides new predictions.
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    Making a Good Impression: The Incentive Effects of Employee Myopia on Employer Supervision
    ( 2022) Ramchandani, Abhishek ; Lilge, Alexandra
    What determines how much supervision employees receive? We show that the employees' keenness to make a strong 'first' impression on the top management -- myopia -- characterizes the level of supervision. An employee can always impress the employer by generating 'high' output. However, supervision allows the employee to make a 'first' impression via his report about his performance on the task. A more hands-on supervision style is valuable since top management can advise a faltering employee. Hands-on supervision also reduces compensation costs since the employee's desire to impress the supervisor motivates him to work hard. However, greater myopia can reduce the value of hands-on supervision when the employee might misreport his performance. Greater myopia incentivizes the employee to misreport more and, in conjunction with hands-on supervision, work hard, since he wants to impress the supervisor. The increased misreporting reduces the advice value of supervision since the employer's advice is unlikely to be helpful. However, the stronger effort incentive reduces the employer's compensation costs and increases the value of hands-on supervision. We show that when the internal controls are (weak) strong, the (first) second effect dominates, and the employer chooses (lesser) greater supervision.
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    Information Design with Equilibrium Selection
    ( 2022) Ebert, Michael ; Kadane, Joseph ; Simons, Dirk ; Stecher, Jack
    This paper extends the solution concept in information design problems, in which a designer aims to implement a particular game outcome by controlling the structure of signals that the players receive. Specifically, we consider settings in which an equilibrium is implementable only if it satisfies an exogenous selection criterion. We focus on optimal information design in a common-interest two-player game with binary actions, requiring the selected equilibrium to satisfy risk dominance. We provide a method for the designer to maximize the probability of making the best equilibrium risk dominant, and show how to extend our approach to other settings.