The paper Optimal Disclosure When Some Information is Soft, describes the authors’ belief that current disclosure regime emphasizes the disclosure of hard versus soft information, creating an incentive to improve hard measures at the expense of soft information. The research refutes the common assumption in academic literature that finds more disclosure is better.
“Hard” information includes easy-to-measure data like revenues and sales, net profits and the value of assets owned, whereas soft information includes intangibles such as the value of research and development, employee training and morale. The paper acknowledges that only hard information can be credibly disclosed because soft information cannot be verified (for example, there is no objective measure for the quality of a company’s human capital or corporate culture). The paper finds disclosure can distort management’s investment decisions, causing them to favor investments than can be disclosed – such as favoring current earnings over research and development.
The paper finds that the effect of the disclosure imbalance can vary by industry. In an article discussing the paper, Alex Edmans, one of the authors, stated
There is no single optimum balance between hard and soft information, because that level will be different for various firms and industries. But the importance of soft information, such as research and development, will generally be greater for technology and other firms that must constantly break ground, he points out. Hence, firms in the software, Internet or pharmaceutical industries are likely to suffer the greatest distortion from regulations that force disclosure of hard information.”
This paper highlights the limitations of disclosure, questioning commonly held assumptions that all types of information are easily disclosed and that more disclosure is always better. As Edman says, “when policymakers are thinking, ‘Do we want even more disclosure?’ they should think, ‘Well, there is a cost to that.’”