Properties of Optimal Accounting Rules in a Signalling Game

We characterize the properties of optimal accounting rules in a signaling game where an impatient entrepreneur sells shares to competitive investors. The entrepreneur can signal her private information about the fundamental of the rm by retaining a fraction of the shares. In addition, she can commit to disclosing information according to a set of accounting rules chosen ex ante. Information disclosure reduces signaling cost so that perfect diclosure is optimal. However, perfect disclosure requires disclosing in nite amount of information (measured by reduction of Shannon's entropy), which is usually unrealistic. When disclosure can only reveal nite amount of information, the optimal accounting rule features an inmum and a summary statistic of the fundamental. The in mum can be interpreted as being consistent with various conservative accounting rules while the statistic summarizes the most relevant information determined by the signalling game. We thank Ivan Marinovic and Steve Morris for their helpful comments and suggestions.