Discretionary Disclosure and Efficiency of Entrepreneurial Investment

This study examines efficiency implications of discretionary disclosure for ex ante investment and ex post project abandonment in an entrepreneurial setting. Privacy of the ex ante investment combined with subsequent discretionary disclosure of information about a project's future payoff engenders underinvestment. This is in contrast to the possible overinvestment when the ex ante investment is publicly observable. Distortions in ex ante investment lead to inefficiencies in ex post project abandonment. If the ex ante investment is unobservable, a greater likelihood of receiving private information or higher quality of that information alleviates underinvestment. By contrast, if the ex ante investment is observable, information may be ex ante valueless. These results may be useful for assessing real effects of disclosure regulations and conducting empirical inquires about up- front investment, project abandonment, and frequency of initial public offerings.