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: (a) exclusive reliance on soft disclosures tends to convey bad news, (b) credibility is greater when unfavorable information is reported and (c) 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.

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 [] also examine the interaction between verifiable and unverifiable information. In their model, firm value is the sum of two components with differing verifiability.…”

Venture capital certification of small and medium‐sized enterprises towards banks: evidence from China

“…Because of operating cost constraints, limited accounting expertise and the lack of internal rules, SMEs often provide financial statements with lower quality. Such deficiencies in ‘hard’ information typically lead to a bias against SME borrowers (Berger and Udell, , ; Bertomeu and Marinovic, ). In addition, China's inefficient banking sector (Xu and Lin, ; Ho and Iyke, ) and SMEs being innovative and privately owned (Allen et al ., ; Sohn and Kim, ) may further exacerbate the information asymmetry and disadvantage SMEs in accessing bank loans.…”

“…The features of SMEs may contribute to various levels of information asymmetry and their difficulty in accessing bank loans. Existing literature suggests that unequal development of the banking sector in the macro environment (Xu and Lin, ; Ho and Iyke, ), sector‐related features such as that of high‐tech (Brinckmann et al ., ; Sohn and Kim, ), and firm‐level fundamentals such as that of smaller size (Stiglitz and Weiss, ; Bertomeu and Marinovic, ) and that of private ownership (Allen et al ., ; He et al ., ) may exacerbate the information asymmetry and further disadvantage SMEs when accessing bank loans. Therefore, it is worthwhile to examine the impacts of VC backup towards various SMEs under financial constraint.…”

“…In other words, there can be less information asymmetry between larger firms and banks. Larger firms, with more assets, are often less financially constrained with better access to external resources (Bertomeu and Marinovic, ; Zhang et al ., ; Marti and Quas, ). Therefore, VC backup may signal less obvious certification of larger firms towards banks.…”

Mandatory and Voluntary Disclosures: Dynamic Interactions

“…Teoh and Hwang [] 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 []. In their static setting, revelation of soft information arises because some manager types are exogenously required to report soft information truthfully.…”