Voluntary Precision Disclosure and Endogenous Market Feedback
Management Science · 2023 · Volume 69 · Issue 9
Abstract
We explore a manager’s incentives to disclose the precision of a signal about firm profitability. Voluntary disclosure of precision information encourages traders to acquire private information, increasing price informativeness and improving the firm’s investment efficiency. We highlight a novel tradeoff: on the one hand, more precise public information crowds out traders’ information acquisition by leveling the playing field. On the other hand, there can also be a crowding-in effect because high-precision disclosures indicate greater managerial confidence and higher investment, which increases the traders’ value of information. The crowding-in effect can dominate if the firm discloses above-average profitability. We derive testable predictions regarding the financial market consequences of supplemental disclosures that are informative about the precision or relevance of payoff-related signals. This paper was accepted by Brian Bushee, accounting.
Keywords
precision information, voluntary disclosure, information acquisition, market feedback
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