Voluntary Precision Disclosure and Endogenous Market Feedback

Jan Schneemeier ()
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Jan Schneemeier: Kelley School of Business, Indiana University, Bloomington, Indiana 47405

Management Science, 2023, vol. 69, issue 9, 5618-5637

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.

Keywords: precision information; voluntary disclosure; information acquisition; market feedback (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:9:p:5618-5637

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