Controlling information asymmetry precision to extract private benefits

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This article considers an asymmetry of information setting between a CEO (the insider) and the outside investors concerning the yearly earnings disclosure of a company. Having an equity stake, the insider has to choose in a strategic manner the precision of the information that is delivered publicly to investors. The insider tries to maximize the private benefits that she/he is going to divert from the firm; however she/he does not want to be found out, so they must act in a way that prevents this from happening. Hence, private benefits are defined as the difference between the non-manipulated cash-flow value the manipulated cash-flow value (done by the insider) whilst taking into account, for the latter, a percentage of the cash-flow that is owned by the insider as well as extraction costs and penalties. Two main contexts are considered: a Bayesian (risky) case and an ambiguity case. In each of them, we study the impact of the variations of costs and penalties on private benefits and compare the respective outcomes. We conclude by saying that a risky environment allows insiders to monopolize certain private benefits but this may be much more significant in an ambiguous environment than in a risky one. Regulation is an important tool for reducing them.

Author(s):

Anh Ngoc Lai    
University of Rennes 1
France

Patrick Navatte    
University of Rennes 1
France

Jean-Laurent Viviani    
University of Rennes 1
France