Fixing the Proprietary Cost Assumption in Discretionary Disclosure Models

I present a critique on the common assumption of fixed proprietary costs of disclosure used in discretionary disclosure models. I show that proprietary costs that are fixed, i.e., independent of the disclosed information, are inherently contradictory. To sustain independence requires either that the counterparty imposing proprietary costs is indifferent to the information, or that the disclosing firm is indifferent to what the counterparty will do with the information. Either of these is inconsistent with a plain interpretation of proprietary costs of disclosure, in which a counterparty, through their actions in response to a disclosure, reduces the disclosing firm's payoff. I recommend that researchers stop using this inherently contradictory assumption