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Voluntary Precision Disclosure and Endogenous Market Feedback

Author

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  • Jan Schneemeier

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

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.

Suggested Citation

  • Jan Schneemeier, 2023. "Voluntary Precision Disclosure and Endogenous Market Feedback," Management Science, INFORMS, vol. 69(9), pages 5618-5637, September.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:9:p:5618-5637
    DOI: 10.1287/mnsc.2022.4577
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