Multi-firm voluntary disclosures for correlated operations

We study the no-arbitrage theory of voluntary disclosure (Dye, J Account Res 23:123–145, 1985, and Ostaszewski and Gietzmann, Rev Quant Financ Account 31: 1–27, 2008), generalized to the setting of $n$ firms, simultaneously and voluntarily, releasing at the interim-report date ‘partial’ information concerning their ‘common operating conditions’. Each of the firms has, as in the Dye model, some (known) probability of observing a signal of their end of period performance, but here this signal includes noise determined by a firm-specific precision parameter. The co-dependency of the firms results entirely from their common operating conditions. Each firm has a disclosure cutoff, which is a best response to the cutoffs employed by the remaining firms. To characterize these equilibrium cutoffs explicitly, we introduce $n$ new hypothetical firms, related to the corresponding actual firms, which are operationally independent, but are assigned refined precision parameters and amended means. This impounds all existing correlations arising from conditioning on the other potentially available sources of information. In the model the actual firms’ equilibrium cutoffs are geometric weighted averages of these hypothetical firms. We uncover two countervailing effects. Firstly, there is a bandwagon effect, whereby the presence of other firms raises each individual cutoff relative to what it would have been in the absence of other firms. Secondly, there is an estimator-quality effect, whereby individual cutoffs are lowered, unless the individual precision is above average.