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.
Bibliographical noteFunding Information:
We thank Romana Autrey, Carsten Bienz, Chiara Canta, Hans K. Hvide, Tiago da Silva Pinheiro, Fr?ystein 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.
© 2017 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Organizational Behavior and Human Resource Management