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

13 March 2017 22:58

(updated: 7 September 2017 12:32)

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

The article "Communication of soft information: Reputation andimperfect enforcement of reporting quality" by Jay Pil Choi, Eirik Gaard Kristiansen and Jae Nahm has been published in the Journal of Economic Behavior & Organization.

The article "Communication of soft information: Reputation andimperfect enforcement of reporting quality" by Jay Pil Choi, Eirik Gaard Kristiansen and Jae Nahm has been published in the Journal of Economic Behavior & Organization.

Abstract:

Entrepreneurs report unverifiable soft information to investors. The credibility of soft infor-mation depends on the entrepreneur’s reputation concern. In equilibrium, high-talententrepreneurs, who are better at developing profitable projects in the future and there-fore have stronger reputation concerns, signal their talents by producing honest reportson current projects. We show how probabilistic third-party monitoring of reporting qual-ity changes some firms’ reporting strategies, which again spill over to the financing costsof firms not directly affected by improved monitoring. In some cases, improved monitor-ing of reporting quality can reduce firms’ reputation concerns and result in less efficientcommunication of information.