A Theory of Hard and Soft Information

Abstract

We study optimal disclosure via two competing communication channels: hard information whose value has been verified, and soft disclosures such as forecasts, unaudited statements, and press releases. We show that certain soft disclosures may contain as much information as hard disclosures, and we establish that: (1) exclusive reliance on soft disclosures tends to convey bad news, (2) credibility is greater when unfavorable information is reported, and (3) misreporting is more likely when soft information is issued jointly with hard information. We also show that a soft report that is seemingly unbiased in expectation need not indicate truthful reporting. We demonstrate that mandatory disclosure of hard information reduces the transmission of soft information, and that the aggregation of hard with soft information will turn all information soft. JEL Classifications: D72; D82; D83; G20.

Uniform Versus Discretionary Regimes in Reporting Information with Unverifiable Precision and a Coordination Role

“…Our paper extends and contributes to this literature by studying the interaction between verifiable and unverifiable information in a setting with strategic uncertainty. Bertomeu and Marinovic [2014] also examine the interaction between verifiable and unverifiable information. In their model, firm value is the sum of two components with differing verifiability.…”

Mandatory and Voluntary Disclosures: Dynamic Interactions

“…Teoh and Hwang [1991] analyze a single-period disclosure model in which a firm's disclosure signals soft private information about its own type. The idea that disclosures of hard information can implicitly reveal soft information is also present in Bertomeu and Marinovic [2016]. In their static setting, revelation of soft information arises because some manager types are exogenously required to report soft information truthfully.…”

“…Thus, V t refers to the stochastic earnings at date t, with their realized values denoted by v t , for t = 1, 2. 4 The log-concavity assumption is widespread in the literature (e.g., see Dye [1986], Bagnoli and Bergstrom [2005], Sivaramakrishnan [2008, 2010], and Bertomeu and Marinovic [2016]), and is satisfied by a large family of commonly used distributions including normal, gamma, chi-square, beta, and uniform. 5 An equivalent, alternative assumption would be that the manager always privately observes the growth prospects G, but learns earnings V 1 only with probability q 1 .…”

Fiscal Governance, Information Capacity, and Subnational Capital Finance

“…At the heart of the theoretical inquiry are two core elements. First, information plays a critical role in markets (Akerlof 1970; Stiglitz and Weiss 1981; Diamond 1984; Ramakrishnan and Thakor 1984; Leland and Pyle 1977; Bertomeu and Marinovic 2016; Liberti and Petersen 2017). Information reduces transaction costs, which reduces geographic boundaries and increases the speed and scale of financial transactions (O’Brien 1992).…”

“…“[F]irms’ access to capital depends upon how informationally transparent the firms are or how much hard information the financial markets have about the firm” (Liberti and Petersen 2017, 6). Information is hard or soft, with the former referring to information that is quantifiable, standardized, may be public, and whose collection can be separated from decision-making; the latter information is contextual, nonstandardized, proprietary, and is collected by the decision maker (Bertomeu and Marinovic 2016; Liberti and Petersen 2017). Hard information is most present in a transparent information environment, and soft information is most present in an opaque information environment.…”