Disclosure under noisy information processing

Bertomeu, Jeremy and Cheynel, Edwige and Hu, Peicong (2026): Disclosure under noisy information processing.

Abstract

We study voluntary disclosure when investors observe firm reports through noisy information intermediaries such as auditors, analysts, rating agencies, or data providers. Any processing noise overturns the standard prediction of a unique partial-disclosure equilibrium. With low disclosure costs, the model unravels to full disclosure despite positive costs. With higher costs, the game admits two threshold equilibria featuring different disclosure probabilities. We characterize how the cost threshold for unraveling and the equilibrium set respond to changes in noise and fundamental uncertainty. In settings with high disclosure, both uncertainty and processing noise reduce disclosure, while higher certification costs can counterintuitively increase it. Endogenizing disclosure costs as optimal fees shows how profit-maximizing intermediaries select among equilibria, potentially generating a high-fee, high-disclosure regime. Extensions with bounded support, uncertain information endowment, endogenous noise, and competing information sources apply the insights to general information environments. The results caution against interpreting greater frictions as necessarily reducing disclosure.

• Item Type: MPRA Paper
• Language: English
• Keywords: Voluntary Disclosure, Information Processing, Noisy Communication, Certification, Auditors, Information Intermediaries, Equilibrium Multiplicity, Unraveling
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

References

Acharya, Viral V., Peter DeMarzo, and Ilan Kremer (2011) 'Endogenous information flows and the clustering of announcements.' American Economic Review 101(7), 2955-2979

Aghamolla, Cyrus, and Byeong-Je An (2021) 'Voluntary disclosure with evolving news.' Journal of Financial Economics 140(1), 21-53

Aghamolla, Cyrus, and Kevin Smith (2023) 'Strategic complexity in disclosure.' Journal of Accounting and Economics 76(2-3), 101635

Akerlof, George A. (1970) 'The market for lemons: Quality uncertainty and the market mechanism.' Quarterly Journal of Economics 84(3), 488-500

Banerjee, Snehal, Ivan Marinovic, and Kevin Smith (2024) 'Disclosing to informed traders.' Journal of Finance 79(2), 1513-1578

Battigalli, Pierpaolo, and Marciano Siniscalchi (2002) 'Strong belief and forward induction reasoning.' Journal of Economic Theory 106(2), 356-391

Ben-Porath, Elchanan, and Eddie Dekel (1992) 'Signaling future actions and the potential for sacrifice.' Journal of Economic Theory 57(1), 36-51

Ben-Porath, Elchanan, Eddie Dekel, and Barton L. Lipman (2018) 'Disclosure and choice.' Review of Economic Studies 85(3), 1471-1501

Bertomeu, Jeremy, and Davide Cianciaruso (2018) 'Verifiable disclosure.' Economic Theory 65(4), 1011-1044

Bertomeu, Jeremy, Igor Vaysman, and Wenjie Xue (2021) 'Voluntary versus mandatory disclosure.' Review of Accounting Studies 26, 658-692

Beyer, Anne, Daniel A. Cohen, Thomas Z. Lys, and Beverly R. Walther (2010) 'The financial reporting environment: Review of the recent literature.' Journal of Accounting and Economics 50(2-3), 296-343

Chen, Hui, and Li Yang (2023) 'Stability and regime change: The evolution of accounting standards.' Accounting Review 98(3), 135-152

Chen, Ying, Navin Kartik, and Joel Sobel (2008) 'Selecting cheap-talk equilibria.' Econometrica 76(1), 117-136

Crawford, Vincent P., and Joel Sobel (1982) 'Strategic information transmission.' Econometrica 50(6), 1431-1451

Doyle, Jeffrey T., Jared N. Jennings, and Mark T. Soliman (2013) 'Do managers define non-GAAP earnings to meet or beat analyst forecasts?' Journal of Accounting and Economics 56(1), 40-56

Dybvig, Philip H. (2023) 'Nobel lecture: Multiple equilibria.' Journal of Political Economy 131(10), 2623-2644

Dye, Ronald A. (1985) 'Disclosure of nonproprietary information.' Journal of Accounting Research 23(1), 123-145

Einhorn, Eti (2007) 'Voluntary disclosure under uncertainty about the reporting objective.' Journal of Accounting and Economics 43(2-3), 245-274

Einhorn, Eti (2018) 'Competing information sources.' Accounting Review 93(4), 151-176

Fischer, Paul E., and Phillip C. Stocken (2001) 'Imperfect information and credible communication.' Journal of Accounting Research 39(1), 119-134

Frankel, Richard, Jared Jennings, and Joshua Lee (2022) 'Disclosure sentiment: Machine learning vs. dictionary methods.' Management Science 68(7), 5514-5532

Frankel, Richard, Sarah McVay, and Mark Soliman (2011) 'Non-GAAP earnings and board independence.' Review of Accounting Studies 16(4), 719-744

Frenkel, Sivan, Ilan Guttman, and Ilan Kremer (2020) 'The effect of exogenous information on voluntary disclosure and market quality.' Journal of Financial Economics 138(1), 176-192

Frenkel, Sivan, Ilan Guttman, and Ilan Kremer (2024) 'Strategic disclosure with fake and real news.' Working paper

Friedman, Henry L., and Mirko S. Heinle (2016) 'Taste, information, and asset prices: Implications for the valuation of CSR.' Review of Accounting Studies 21(3), 740-767

Friedman, Henry L., Mirko S. Heinle, and Irina Luneva (2024) 'Implications of introducing investor-focused ESG reporting.' The Wharton School Research Paper, forthcoming

Friedman, Henry L., and Lucas Mahieux (2021) 'How is the audit market affected by characteristics of the nonaudit services market?' Journal of Accounting Research 59(3), 959-1020

Govindan, Srihari, and Robert Wilson (2009) 'On forward induction.' Econometrica 77(1), 1-28

Guttman, Ilan, Ohad Kadan, and Eugene Kandel (2006) 'A rational expectations theory of kinks in financial reporting.' Accounting Review 81(4), 811-848

Guttman, Ilan, Ilan Kremer, and Andrzej Skrzypacz (2014) 'Not only what but also when: A theory of dynamic voluntary disclosure.' American Economic Review 104(8), 2400-2420

Guttman, Ilan, and Xiaojing Meng (2021) 'The effect of voluntary disclosure on investment inefficiency.' Accounting Review 96(1), 199-223

Hart, Sergiu, Ilan Kremer, and Motty Perry (2017) 'Evidence games: Truth and commitment.' American Economic Review 107(3), 690-713

Horrace, William C. (2005) 'Some results on the multivariate truncated normal distribution.' Journal of Multivariate Analysis 94(1), 209-221

Jiang, Fuwei, Joshua Lee, Xiumin Martin, and Guofu Zhou (2019) 'Manager sentiment and stock returns.' Journal of Financial Economics 132(1), 126-149

Jiang, Xu, Baohua Xin, and Yan Xiong (2023) 'The value of mandatory certification: A real effects perspective.' Journal of Accounting Research 61(1), 377-413

Jiang, Xu, and Ming Yang (2017) 'Properties of optimal accounting rules in a signaling game.' Journal of Accounting and Economics 63(2-3), 499-512

Jung, Woon-Oh, and Young K. Kwon (1988) 'Disclosure when the market is unsure of information endowment of managers.' Journal of Accounting Research 26(1), 146-153

Kachelmeier, Steven J., Dan Rimkus, Jaime J. Schmidt, and Kristen Valentine (2020) 'The forewarning effect of critical audit matter disclosures involving measurement uncertainty.' Contemporary Accounting Research 37(4), 2186-2212

Kanodia, Chandra et al. (2007) 'Accounting disclosure and real effects.' Foundations and Trends in Accounting 1(3), 167-258

Kremer, Ilan, Amnon Schreiber, and Andrzej Skrzypacz (2024) 'Disclosing a random walk.' Journal of Finance 79(2), 1123-1146

Laux, Volker, and D. Paul Newman (2010) 'Auditor liability and client acceptance decisions.' Accounting Review 85(1), 261-285

Libgober, Jonathan, Beatrice Michaeli, and Elyashiv Wiedman (2023) 'With a grain of salt: Uncertain veracity of external news and firm disclosures.' arXiv preprint arXiv:2304.09262

Lichtig, Avi, and Ran Weksler (2023) 'Information transmission in voluntary disclosure games.' Journal of Economic Theory 210, 105653

Lizzeri, Alessandro (1999) 'Information revelation and certification intermediaries.' RAND Journal of Economics 30(2), 214-231

Man, Priscilla T.Y. (2012) 'Forward induction equilibrium.' Games and Economic Behavior 75(1), 265-276

Marinovic, Ivan (2013) 'Internal control system, earnings quality, and the dynamics of financial reporting.' RAND Journal of Economics 44(1), 145-167

Marinovic, Ivan, and Sri S. Sridhar (2015) 'Discretionary disclosures using a certifier.' Journal of Accounting and Economics 59(1), 25-40

Morgan, John, and Phillip C. Stocken (2003) 'An analysis of stock recommendations.' RAND Journal of Economics 34(1), 183-203

Pearce, David G. (1984) 'Rationalizable strategic behavior and the problem of perfection.' Econometrica 52(4), 1029-1050

Peris, Joaquin Peris (2025) 'Voluntary disclosure and the internal information environment of the firm.' PhD dissertation, Columbia University

Rappoport, Daniel (forthcoming) 'Evidence and skepticism in verifiable disclosure games.' Theoretical Economics

Sall, Ibrahima (2025) 'When transparency undermines social welfare: A tale of ESG disclosure and product market catering.' Working paper

Sampford, Michael R. (1953) 'Some inequalities on Mill's ratio and related functions.' The Annals of Mathematical Statistics 24(1), 130-132

Shin, Hyun Song (1994) 'News management and the value of firms.' RAND Journal of Economics pp. 58-71

Shimoji, Makoto, and Joel Watson (1998) 'Conditional dominance, rationalizability, and game forms.' Journal of Economic Theory 83(2), 161-195

Stocken, Phillip (2013) 'Strategic accounting disclosure.' Foundations and Trends in Accounting 7(4), 197-291

Stocken, Phillip C., and Robert E. Verrecchia (2004) 'Financial reporting system choice and disclosure management.' Accounting Review 79(4), 1181-1203

Stocken, Phillip C., and Gaoqing Zhang (2025) 'Accounting measurement rules in the presence of higher-order uncertainty.' Accounting Review 100(6), 263-283

Suijs, Jeroen (2007) 'Voluntary disclosure of information when firms are uncertain of investor response.' Journal of Accounting and Economics 43(2-3), 391-410

Versano, Tsahi (2021) 'Silence can be golden: On the value of allowing managers to keep silent when information is soft.' Journal of Accounting and Economics 71(2-3), 101399

Verrecchia, Robert E. (1983) 'Discretionary disclosure.' Journal of Accounting and Economics 5, 179-194

Verrecchia, Robert E. (1990) 'Information quality and discretionary disclosure.' Journal of Accounting and Economics 12(4), 365-380

Waymire, Gregory B., Sudipta Basu et al. (2008) 'Accounting is an evolved economic institution.' Foundations and Trends in Accounting 2(1-2), 1-174

Zeff, Stephen A. (1972) 'Chronology of significant developments in the establishment of accounting principles in the United States, 1926-1972.' Journal of Accounting Research pp. 217-227