(In)Consistent Internal-External Communication? How Internal Communication Technology Affects Voluntary Disclosure

We investigate how improvements in organizations’ internal communication technology affect their voluntary disclosure, a form of external communication. By developing a model with a headquarters manager and several divisional managers, we formalize two competing economic forces—information learning and decision centralization—that shape the headquarters manager’s information precision and, consequently, voluntary disclosure. While improved internal communication technology helps the headquarters manager to collect information from divisional managers, it reduces divisional managers’ incentives to acquire information as decision-making becomes more centralized. As a result, these two forces jointly produce an inverse U-shape relation between internal and external communications. We empirically document robust inverse U-shapes for both public and private firms, and show evidence consistent with the two economic forces. Collectively, our paper furthers our understanding of voluntary disclosure from the perspective of internal agency frictions and sheds light on private firms’ internal-external communications