The kind of silence: managing a reputation for voluntary disclosure in financial markets

Miles B. Gietzmann () and Adam J. Ostaszewski ()
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Miles B. Gietzmann: Bocconi University
Adam J. Ostaszewski: London School of Economics and Political Sciences

Annals of Finance, 2023, vol. 19, issue 4, No 1, 419-447

Abstract: Abstract We create a continuous-time setting in which to investigate how the management of a firm controls a dynamic choice between two generic voluntary disclosure decision rules (strategies) in the period between two consecutive mandatory disclosure dates: one with full and transparent disclosure termed candid, the other, termed sparing, under which values only above a dynamic threshold are disclosed. We show how parameters of the model such as news intensity, pay-for-performance and time-to-mandatory-disclosure determine the optimal choice of candid versus sparing strategies and the optimal times for management to switch between the two. The model presented develops a number of insights, based on a very simple ordinary differential equation characterizing equilibrium in a piecewise-deterministic model, derivable from the background Black–Scholes model and Poisson arrival of signals of firm value. It is shown that in equilibrium when news intensity is low a firm may employ a candid disclosure strategy throughout, but will otherwise switch (alternate) between periods of being candid and periods of being sparing with the truth (or the other way about). Significantly, with constant pay-for-performance parameters, at most one switching can occur.

Keywords: Asset-price dynamics; Voluntary disclosure; Dynamic disclosure policy; Markov piecewise-deterministc modelling; Corporate transparency reputation (search for similar items in EconPapers)
JEL-codes: D82 G32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10436-023-00430-5

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