Disclosure of Hard vs. Soft Information

This paper studies voluntary disclosure when (a) there is uncertainty about managerial propensity to report truthfully, (b) some components of the firm’s value may be certified for a cost (“hard”), (c) other components may be disclosed but not certified free of misstatements (“soft”). We establish that untruthful managers are more likely to certify hard information and that, among truthful managers, those with more favorable soft information also certify more. Even if certification is costless, unraveling to a complete certification of the hard information may not occur. We develop several testable predictions linking the presence or absence of a certification to managerial credibility, earnings quality, the magnitude or likelihood of frauds and market reactions to disclosures. The model has many natural applications, including credit ratings, press releases vs. financial statements, auditing choice, going dark and voluntary asset appraisals.